Why Diversify my Portfolio?

“Diversifying well is the most important thing you need to do in order to invest well”

- Ray Dalio, Bridgewater Associates

A single asset syndicate has historically been a popular avenue for investors to engage with commercial property investment for several reasons:

• A relatively ‘simple’ management regime
• Historically strong returns
• Perceived as being a simpler investment
• Popular over the past 20 years.

As our world has evolved and become more complicated, picking individual asset class or tenant-specific winners across multiple cycles and events (interest rates, inflation, market trends, technology, etc.) has become harder and is now introducing more long-term risk. Technology and innovation are driving changes in all industries which means today’s winners may fall out of favour with time. This means that for a long-term investment approach (10-15 years plus), a diversified approach across multiple asset classes, locations, and tenants is likely to be more resilient with less volatility.

Diversifying your investments reduces the amount of risk you’re exposed to and, in most cases, will put you in a better position to weather storms and cycles.

Diversification can take many forms, but in its simplest form, it’s not having all your eggs in one basket. This could be through various investments: shares, term deposits, commodities, and property. Or, in the case of commercial property, diversification is choosing investments across different regions (city vs regional, north vs south), across multiple sectors (retail, industrial, office, commercial), and consequently, tenants, which is the key to reduced risk and, hence, stabilised cash flow.

What are the benefits of diversification?

Diversifying your property investment portfolio means:

• Tenant vacancy or failure is less problematic and more easily absorbed than in a single asset.
• More robust investor distributions as a result of smoother cashflows which are less susceptible to rapid fluctuations.
• Lower debt funding costs as a result of banks having the ability to take security over multiple assets which reduces their risk exposure and consequential capital allocation requirements.
• Better ability for a diversified fund to weather market fluctuations.
• A diversified fund creates opportunities to seize market opportunities and capitalize on emerging trends. For example, selling assets to reposition asset allocations, recycle capital into assets with more upside potential and ultimately drive value creation for investors.
• Long-term growth and capital preservation.
• A more efficient management and governance regime.
• Taxation benefits of multi-rate PIE scheme – which for the majority of investors, means less tax to pay and higher net returns.

How do I diversify?

The thought of choosing the right asset mix to diversify your property portfolio can be empowering for some and daunting for others – there is no one right way, just the way that suits your investing appetite.

Mackersy Property investors diversify by choosing a range of single-asset investments or investing in a diversified fund, which itself invests in a range of asset types, locations, and tenants. In the near future, Mackersy Property intends to engage with director groups and investors on a number of the older single-asset syndicates to ascertain if there is support to create a large diversified fund. This fund will deliver all of the benefits of traditional commercial property investment (stable returns, capital appreciation, hedge against inflation, etc) in a tax-efficient and streamlined way and reduce volatility and risk into the future.