Make an annuity date with real estate right now
November 18, 2014 by Kevin Startt
They say that the definition of a good real estate agent is someone who has had a mortgage loophole named after them. Judging by a couple of recent articles though, real estate agents may have the last laugh as the housing industry shows increasing promise of continued growth. The entire financial services industry seems to have picked up on this trend. One of the oldest acknowledgements of the importance of real estate in diversification even in annuities comes from the Jewish Talmud, written somewhere between 1200 BCE and 500 AD: “Let every man divide his money into three parts and invest a third in land, a third in business and a third let him keep in reserve.”
Even the index annuity landscape is beginning to get in the game, [currently two] carriers have an index linked to real estate, according to Jamie Johnson at annuity and life [market research company], Wink, Inc. Even with the increase in additional crediting options, as the alternative investment space matures, over 50 percent of the indexed annuity marketplace is still dominated by the Standard and Poor’s 500 crediting index.
Most agents who sell indexed life and annuity products remain non-securities licensed, so it is natural for the agent to gravitate towards the comforting confines of the three major crediting methods: monthly point-to-point, monthly averaging and annual point-to-point. The earliest civilizations understood the need for diversification. In addition, they understood the importance of real estate in the process. It is no surprise then that agents would begin to think about alternative indices, like real estate.
The growth of alternative or enhanced indices makes even more sense in view of the fact that real estate plays a major role behind Treasuries in the portfolios of many life insurance companies and the revelation that real estate and commodities outperformed 10 other asset classes over the last 15 years ending July 31, 2014 at a time of extremely low inflation. Usually, this asset class is thought of as an inflation hedge, but income-producing real estate has proved particularly resilient even in the midst of the current tepid inflation environment.
Commodities came in a close second. An investment of $10,000 in one REIT grew to $35,030 over the 15 year period, or nearly three times as much as U.S. large cap stocks, according to the ETF for the Standard and Poor’s 500, the SPY. No wonder savers have flocked to commodities-linked indexed annuities that were up in 2008-09 on a back -tested basis and real estate. A commodities linked product, offered by a Midwestern insurer, was one of the leading sellers in 2011-2012. The question agents and brokers should ask now is, has the gravy train left the station? Is real estate further along in the economic cycle than U.S. stocks and due for a big correction?Most of the real estate indices are indirectly invested in real estate investment trusts (REITS) or in exchange traded funds (ETFs) that own REITS. As a wholesaler in the early days when insurance companies first began offering mutual funds, real estate, and oil and gas, my real estate counterpart at a major top-tier carrier always liked to one up me in emphasizing that real estate had done as well as stocks since World War II, which was true prior to the Tax Reform Act of 1986 (TRA). I always had to mention that an investor does not buy real estate or stocks for total return advantages, but for diversification.
For the last 22 years, according to the FTSE NAREIT Index, the average correlation between real estate and the S&P 500 was 0.54, so that if stocks went down 10 percent, real estate would likely only go down 5.4 percent and vice versa.
Including real estate in a diversified annuity portfolio, regardless of annuity type, should provide peace of mind and more consistent returns, along with the confidence that lifetime income flows are enhanced from the mitigation of having all of the owner or annuitant’s premium dollar exposed to U.S. markets.
All three of the products being offered by insurers feature an international component as well, which further enhances diversification. The real estate crediting option also offers an opportunity to hedge against the U.S. interest rate cycle. According to AXA-Equitable, rates have been higher 95 percent of the time in the United States; so at some point, U.S. rates and every derivative exposed to U.S. rates will be affected by an uptick that is difficult to hedge away.
With a strong commercial real estate market and plenty of ways to participate in real estate, including pension-like savings vehicles, annuities and REITS, investors should take advantage of this means of diversifying a portfolio.
