The next time you speak to a potential REIT investor, don’t tell them “investing in real estate is a great opportunity.” Instead, tell them “there are specific opportunities that currently exist in the real estate market that we should explore.”
The reason is that not all real estate is perceived equally – for example some investors currently see risks in office buildings, but opportunities in medical offices.
That’s one of the conclusions of a new year-long study titled Building Opportunities: The Compelling Language of Real Estate Investment Trusts by global investment management firm Invesco.
“This study focused on helping advisors have confident and impactful conversations with their clients about real estate,” said Paul Brunswick, head of Invesco Global Consulting.
How the study worked
The study, conducted in concert with language strategy firm Maslansky + Partners, measured the emotional responses investors have to certain words and recommends words and phrases to use – or lose. It’s the 23rd study Invesco has conducted during the past 15 years in Canada, the U.S., U.K. and Japan on the language of financial services.
Brunswick said investors often turn to real estate during periods of high inflation which “created a sense of urgency around this particular study.”
A total of 500 investors were surveyed for the study, all of whom used financial professionals. Three-quarters of the investors (52 per cent male, 48 per cent female) had real estate investing experience and at least $1 million in investable assets.
They listened to language financial advisors typically use to describe real estate and investment opportunities in real estate with a client and, using a dial, were asked to react either positively or negatively to what was being said.
For example, investors were asked whether they would prefer consistent rental income or alternative rental income and 57 per cent chose consistent rental income as the most valuable potential benefit a real estate investment could provide.
“That makes sense,” Brunswick said. “People react positively to the principle of being consistent.”
The study found 60 per cent of investors believe it is a good time to invest in real estate, but only 46 per cent said they were likely to do so.
The difference, it says, can be attributed to investors not understanding the role REITs can play within a portfolio.
Investing and diversification
When investors were asked whether they want “a source of income that can rise to stay ahead of inflation” or “an inflation hedge” for their portfolio, 76 per cent chose a source of income and only 24 per cent selected an inflation hedge.
“People look at a hedge either not understanding it, or as a jargon term, or even (as having) a negative connotation.”
Overall, 44 per cent of investors believed “comprehensive” diversification worked best over “true” diversification (29 per cent) and “enhanced” diversification (27 per cent).
When asked if diversification was an investing priority, only 16 per cent said yes.
“When we dug deeper, we learned from them they already thought that they were diversified (with holdings in real estate as a fourth asset class behind stocks, bonds and cash),” Brunswick said. “What they were interested in was comprehensive diversification, meaning to include more asset classes as opposed to different ones.”
The word exclusive also did not test well in the study, Brunswick says. Given the choice, 68 per cent of investors preferred a premium real estate investment to an exclusive real estate investment (32 per cent). “Today’s investors really prefer inclusive investments.”
The study found not all real estate is perceived equally by investors.
The majority of investors felt it was a good time to invest in technology projects (78 per cent), medical offices (72 per cent) and seniors housing (67 per cent) but were less comfortable investing in hospitality, office buildings and retail centres (39, 31 and 25 per cent, respectively).
It also found 61 per cent of investors found there was a bigger advantage in investing in real estate assets when it was described as “more stable than equities” over “less volatile than equities.”
Brunswick notes one of Invesco’s oldest studies, called New Word Order, found financial advisors should be positive in the way they state things to clients, in addition to being personal, plausible and plain-spoken.
The latter is “especially important in an area like real estate where you’re using language that clients would use and not what the industry would use.”
The more financial advisors avoid jargon and use plain spoken language with their clients the more effective they’ll be, he says.
Brunswick admits while it may be difficult for financial advisors to change course with the language they use with clients, it’s worth making the change.
“Language is kind of like an oil tanker: You can change direction, but it takes a really long time to do it.”
However, “by employing the principles that we uncovered in the study, advisors can have more confident, productive conversations with their clients.”