- Bluerock’s Total Income + Real Estate Fund has had high risk-adjusted returns in the past decade.
- Higher inflation has led investors to seek real assets, which historically are strong hedges.
- A strategist shares three key real estate subsectors to invest in as inflation rises.
Investors who chase eye-popping gains in speculative stocks and cryptocurrencies have probably been disappointed in 2022 as risky assets continue to sell off.
Maybe they’d be better off pursuing solid, steady gains — like the kind that the Bluerock Total Income + Real Estate Fund (TIPRX) has consistently produced in the past decade.
The fund is up 10% this year — on pace to top the 9% annual gain it’s averaged in its lifetime — while the S&P 500 has declined nearly 13% year-to-date.
The publicly traded interval fund has closed in the green every year since its inception in 2012 and — amazingly — has posted only three losing quarters in that span, out of a possible 37. It has fetched annual returns of between 1.4% and 21.6%, according to Morningstar, and has only returned less than 6% in a year once.
What’s even more impressive than those returns is that the team at Bluerock Capital Markets running the fund has managed to hit those marks without taking on outsized risk.
In fact, an analysis of the Bluerock Total Income + Real Estate Fund and 6,138 competing open-end funds, closed-end funds, and exchange-traded funds (ETFs) conducted by Bluerock using data from Morningstar Direct — which was then reviewed by Insider — showed that Bluerock’s fund has had the highest Sharpe and Sortino ratios — two metrics designed to measure risk-adjusted returns — since it began trading on October 22, 2012.
Miguel Sosa, a research strategist at Bluerock who works on the investment product, gave Insider some insight into how the Bluerock Total Income + Real Estate Fund pulled this off.
“The natural question that we get is: How have you delivered these returns?” Sosa told Insider in a recent interview. “Very briefly for you, it’s three fundamental pillars.”
Those pillars are as follows, Sosa said: Private real estate, which is the asset class that the fund invests in and is what Sosa called “very stable” and “very growth-oriented;” subadvisors that the firm partners with to develop its strategies; and carefully constructed active asset management.
High inflation means high real estate returns
Though retail investors can’t easily access the private real estate markets and institutional funds that Bluerock can, Sosa said that there are still ways to get exposure to the three subsectors within real estate that are substantial parts of the Bluerock Total Income + Real Estate Fund.
Sosa thinks that real estate is a particularly smart investment right now, given that abnormally high inflation has some experts worried about another recession.
In fact, four-decade-high inflation is one of the most compelling catalysts for the real estate sector, which is up 16.4% in the past 12 months, while the S&P 500 is barely breaking even.
“Real estate, historically, has been a very good hedge against inflation,” Sosa said. “That’s because it’s ultimately a real asset, and it’s an asset that is limited in supply by its very nature. You can’t create new land; you can’t create desirable land. Demand continues to grow for it over time.”
Sosa continued: “So if you’re a long term investor — especially during times of inflation — again, historically speaking — if we look at periods of high inflation, such as the late ’70s, early ’80s, and periods of the ’90s — real estate has performed strongly.”
Though Sosa said that there’s evidence that inflation is starting to peak — such as falling car and energy prices — and should decelerate further in the coming years as supply-chain issues get resolved, he said that higher prices are still likely to persist for at least the next year or two.
How to invest in real estate during periods of high inflation
Investors can get inflation protection through real estate investment trusts (REITs) in the following three real estate subsectors: industrial, residential, and life sciences.
Real estate’s industrial subsector, which includes warehouses and fulfillment centers, has had a great run but is still benefiting from a watershed shift accelerated by the pandemic, Sosa said. Distribution chains have been disrupted as three key trends continue to develop, Sosa said: the decline of physical brick-and-mortar stores, the e-commerce boom, and the advent of two-day, one-day, and even same-day delivery for goods purchased online.
As online order fulfillment gets more challenging and competitive, businesses are getting more efficient by establishing several smaller shipping centers instead of having one huge hub, Sosa said. More warehouse space is required than ever before, which should boost REITs in the space.
“The existing warehouses that they had no longer are suitable for this online presence,” Sosa said.
The residential subsector of real estate has also taken off as a supply-demand mismatch in the housing sector sends home and apartment prices skyward, Sosa said. Since the financial crisis, home supply hasn’t kept pace with demand as the US population grows, the strategist noted, and the pandemic led to millions of people relocating — especially out of cities.
Multifamily residential REITs are Bluerock’s favorite way to play this trend, Sosa said, adding that properties in the Sun Belt are especially attractive because of the region’s lower cost of living and plethora of jobs compared to cities in other parts of the country. Another catalyst for this subsector is that higher real wage growth should continue to support higher rent payments.
Finally, Sosa said he’s excited about the life sciences real estate subsector — largely because of a significant supply-demand mismatch in the space.
Demand for new life-saving and -improving medications is as strong as ever, Sosa said, and job prospects in the biotechnology and pharmaceutical industries are strong. But building the laboratories that those companies use can be a challenge because of specific water, ventilation, and structural requirements, Sosa said, so labs tend to be concentrated in certain areas.
“You just can’t take your run-of-the-mill office complex and convert it into a biotech center,” Sosa said.
The strategist continued: “These types of very specific constraints limit the real estate developers that can construct or convert a life sciences complex for a life sciences tenant. And so this — and just the strong demand that we’re seeing for novel therapeutics — really gives developers and real estate owners the upper hand in the life science sector.”
Investors aiming to get exposure to those three real estate subsectors can either invest in the Bluerock Total Income + Real Estate Fund, which focuses on private markets, or target shares of REITs, or ETFs composed of REITs, in those industries. Note that the following list of ETFs and stocks was compiled by Insider and is not an investing recommendation from Sosa.
For focused exposure to the industrial subsector of real estate, investors can consider the Pacer Benchmark Industrial Real Estate SCTR ETF (INDS). A top way to get direct exposure to the residential real estate subsector is the iShares Residential and Multisector Real Estate ETF (REZ). And a
REIT
that’s as well connected as any to the lifesciences subsector of real estate is Alexandria Real Estate Equities (ARE).