Menlyn Link – Johannesburg, South Africa
As humans, we tend to stick with what we know and trust. Unfortunately, this tendency can prevent us from pursuing once-in-a-lifetime opportunities, taking calculated risks, and achieving our goals. At JTOO Ventures, we frequently notice this issue when we meet with prospective investors and analyze their portfolios. Most individuals simply aren’t taking advantage of the lucrative alternative investments that are available.
Donald Calcagni, chief investment officer at Mercer Advisers, a registered investment adviser based in Santa Barbara, California, sums it up pretty well: “People stick with stocks and bonds because that’s what they see every night on the evening news.”
Just because stocks and bonds are so well known, doesn’t mean they’re providing the best return on investment, which is why investment managers around the globe are seeking alternative investments to diversify their portfolios and outpace public equities. Nearly all top financial advisors recommend alternative investments for high net worth individuals, including a mix of private equity, hedge funds, managed futures, real estate, commodities, and derivatives contracts.
“There’s no way to outperform the stock market by investing only in the stock market,” Calcagni says. So in order to achieve higher returns and surpass the limitations of the stock markets, investors are turning to alternative investments. This trend can be seen in a variety of sectors. For example, according to the National Association of College and University Business Officers, “managers of higher-education endowments now allocate a majority of their assets to alternative investments.”
Private equity real estate is quickly becoming the alternative investment of choice for sophisticated investors worldwide. Investment managers are incorporating real estate into their portfolios for superior returns at lower volatility. In its 2018 Public Pension Study, the American Investment Council (AIC) analyzed investment returns by 163 U.S. public pension funds and found that on a dollar-weighted basis, U.S. public pension funds invest 8.1% of their portfolios in real estate, with another 8.6% of the portfolios in private equity–a combined total of $578 billion. So why all the hype surrounding private equity real estate investments?
Since real estate prices aren’t correlated to the cycles of stocks and bonds, returns are higher compared to other alternative investments with similar expected risk. Plus, property values and rents generally keep pace with inflation. Rental income is also an important factor, as it makes up about half of the returns on real estate (appreciation is also a factor). Yet according to Brian Davis, “the most interesting case for real estate lies in its risk-reward ratio.”
When a team of economists from the University of California, Davis, the University of Bonn, and the German central bank reviewed over 145 years of economic data from 16 countries, they found that residential real estate provided extremely high returns with low risk. In fact, when compared to equities, residential real estate, short-term treasury bills, and longer-term treasury bonds, residential real estate had the best returns, averaging over 7 percent per annum. When measuring the investment’s Sharpe ratio (essentially a risk-reward ratio), real estate averaged 250% better than treasury bonds (0.2) and 185% better than equities (0.27).
Numbers don’t lie, and the numbers are all pointing to real estate as an excellent alternative investment opportunity for discerning investors who seek higher returns. So why isn’t everyone investing in private equity real estate? Traditionally, there has been a high barrier to entry, which has kept many investors out of the residential real estate space: “The minimums to get into a quality fund are often too high for most investors — usually $250,000 per fund,” says Calcagni.
So while many investment managers have been championing real estate investments for some time, many investors simply haven’t been able to play ball.
However, our goal is to provide new ways of co-investing with lower minimums for savvy investors who understand the strategy of alternative assets such as private equity real estate and want to diversify their portfolios with higher return, lower volatility assets. Keeping factors such as risk tolerance, tax situation, time horizons, and objectives in mind, we can help you position your portfolio to win with a private equity real estate investment.
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With double-digit growth in 2017, Cape Town’s luxury real estate market is the second-fastest growing in the world. The South African coastal city has long been an economic hub and is now making a name for itself as the real estate market of choice for ultra high net worth individuals (UHNWI) around the globe.
According to Knight Frank’s 2018 Prime International Residential Index (PIRI) 100, which tracks the movement of the world’s luxury residential property markets, Cape Town’s luxury real estate market grew a staggering 19.9% in 2017. Not only did it outperform the city’s wider mainstream market, but its growth has far outpaced the overall index, which increased by just 2.1% this year.
Cape Town’s high growth luxury real estate market has caught the attention of sophisticated investors worldwide. In May 2018, executives from the top 300 Japanese companies visited South Africa to take advantage of prospective investment opportunities. And they’re not the only ones heavily investing in the South African strategy. South African President Cyril Ramaphosa is set to raise $100 billion in new investment capital in just five years.
The Vogue – Cape Town, South Africa
Cape Town’s rapid growth in the luxury real estate market has propelled it to the number two spot on the 2018 PIRI 100 Index. The economic hub outperformed a number of other notable cities, including Aspen (19%); Amsterdam (15%); Seoul (13.2%); Frankfurt (12.9%); Seattle (12.2%); Paris (12%); Sydney (10.7%); and Madrid (10.6%).
In fact, only the Chinese city of Guangzhou reported higher growth. Of the 100 cities on the index, two thirds reported flat or positive annual price growth in 2017, while only 11 cities, including Cape Town, enjoyed double-digit growth. Cape Town’s growth is virtually unmatched, making it an excellent investment for individuals who want the best return on their investment.
One of the most notable opportunities in Cape Town’s high growth luxury real estate market is the city’s relative value compared to other countries. In cities like Hong Kong, New York, and London, a million dollars won’t give homebuyers much: a reported 22, 25, and 28 square meters of prime property, respectively. In Cape Town, however, one million dollars will net buyers 127 square meters—about five times more than its foreign counterparts. With relatively less costs, high net worth and ultra high net worth individuals are coming here to get more for their dollar.
Zero2ONE Tower – Cape Town, South Africa
The mechanics of supply and demand helped fuel the recent market boom in Cape Town. On the supply side, there is a shortage of high-quality new and existing properties. Together, the coastline and iconic mountain range have made it challenging for investors to secure prime real estate in what has become an extremely competitive marketplace. Only large, well-established players are able to successfully navigate the landscape to capitalize on double-digit growth opportunities.
At the same time, demand is booming with both foreign and domestic buyers scrambling to get a piece of the pie. Specifically, Knight Frank noted that the area near Table Mountain, including the Atlantic Seaboard and City Bowl, had attracted a strong inward migration. While many South Africans are choosing to move to Cape Town, it’s also an in-demand city for the international community.
Since 2015, according to FIN24, “Cape Town has set South African records for both the highest-ever sale price achieved for a residential home – R290m for a house in Bantry Bay – as well as the highest-ever rental price – R450 000 a month for an estate in Constantia.”
Zero2ONE Tower – Cape Town, South Africa
Cape Town is South Africa’s legislative capital and the second-most populous urban area in the country. The lush coastal city is a showcase of biodiversity (some of the greatest in the world) and a growing tech and startup community, making it a fresh, innovative, and welcoming environment for both international and local buyers alike.
According to Deon de Klerk, head of wealth for Africa regions at Standard Bank, “Cape Town is fast becoming a truly global holiday destination and an increasingly desirable residential address for [South Africa]’s high net worth individuals (HNWIs), as well as those from abroad.” In fact, the city was recently dubbed the Monaco of the South.
Despite marginal growth from many cities on the 2018 PIRI 100 Index, Cape Town is proving to be a dominant region for high-growth property investments. Rich in natural resources and economic opportunities, yet without the high costs associated with places like New York, Seoul, and Paris, it’s a no brainer that investors are looking to this South African hub.
With demand from savvy investors accelerating, Cape Town’s high-growth real estate investments are a smart choice for people who seek unique investments with high upside potential. We are excited to be leading exclusive co-investments into South African developments.
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