Using real estate in portfolios to create the right balance between income and illiquidity  

For private wealth clients and their advisers, real estate has long represented more than bricks and mortar. It is the embodiment of tangible value, income-producing resilience and, increasingly, opportunistic growth. But in 2025, the conversation has become more nuanced. Advisers must now consider how to classify real estate within diversified portfolios, how to differentiate between income and capital-returning strategies, and how to match illiquid exposures with client objectives.

“From a portfolio construction perspective, real assets such as property offer both tangible security and exposure to structural themes that are often under-represented in traditional equity and bond holdings,” says Kev Toohey, principal at Atchison.

“They can provide inflation protection, stable income streams, and diversification through their relatively low correlation to listed markets.”

That low correlation, in particular, has grown in relevance during a decade of asset-class convergence, in which listed real estate and equities have become surprisingly sympathetic to the same economic winds.

Andrew Stewart, principal at Mercer, believes advisers need to interrogate their assumptions about real estate allocations, especially listed exposures.

“There’s been a large push toward unlisted components of what we do,” he explains. “We’re finding that listed real estate, from an index perspective, is increasingly correlated with equities, especially as sectors like data centres and industrials dominate those indices.”

In other words, advisers must ask whether listed property is still delivering the defensive and income characteristics clients expect, particularly in retirement portfolios.

The challenge, then, becomes one of alignment. In some cases, real estate may behave more like private equity than infrastructure, especially when the strategy is geared toward capital gains. This is especially true of value-add and opportunistic strategies that emphasise repositioning or developing assets.

“For assets like student accommodation redevelopments, the return is driven by capital gain, not yield. In that sense, it behaves much more like private equity. You’re buying well and creating value,” notes Jason Howes, Executive General Manager, Fund Capital and Product Development at Dexus.

Howes uses the case study of 41 George Street in Brisbane to illustrate the approach.

“Dexus Real Estate Partnership Series (DREP2) has invested into the repositioning of a vacant B-grade office building into purpose-built student accommodation. That’s a two-pronged business model: buying well and then adding value through conversion.

“The return is realised when the repositioned asset enters a highly liquid market segment,” he says.

For private wealth investors, this dynamic may justify a separate sleeve within the alternatives allocation, one that recognises both the illiquidity and the elevated return profile.

This opportunistic lens is more prevalent in today’s real estate investment market than in prior decades, according to John Taylor, Head of Private Capital at Dexus.

“Real estate today is as much about execution and operational capability as it is about location and tenant,” he says.

“You’re no longer buying income streams alone. You’re executing a strategy, and that requires being clear-eyed about risk, especially illiquidity risk”.

Taylor adds that many assets currently being repositioned into student housing or seniors living are not chosen for stable income, but for capital uplift over time.

That being said, many private wealth clients still look to real estate for dependable yield.

“The income-generating capacity of some real assets is not incidental, it’s core to their appeal,” says Toohey.

These assets can sit alongside infrastructure or other income-generating alternatives in a portfolio and serve a stabilising role.

Nevertheless, real estate’s appeal lies not only in income or capital gain but in structural supply-demand imbalances.

“We don’t have a demand issue. We have a supply-side constraint,” says Howes.

“Residential starts in vertical apartments in Melbourne and Sydney are at decade lows. That’s a massive structural driver for sectors like build-to-rent and student accommodation”.

In this way, real estate also becomes a proxy for demographic and economic trends, giving investors exposure to macro themes like population growth, urbanisation, and institutionalisation of previously fragmented sectors.

For Stewart, however, it is the nature of real assets that needs to be challenged, not just their positioning.

“We need to understand what underlies these assets. Are they truly diversifying? Are they defensive? Are they suited to retirement or accumulation phases?” he asks.

This questioning becomes critical in an era where old assumptions no longer hold, and where risk-adjusted returns must be earned, not presumed.

Advisers must also grapple with liquidity constraints.

“A closed-end real estate fund with a capital-gain objective has more in common with private equity than with infrastructure,” says Taylor.

“You’re locking money in, and returns are only realised at exit. It’s essential that clients understand this and allocate accordingly”.

The trade-off, of course, is access to outsized returns that public markets rarely offer.

And as Howes points out, capability matters. “It’s not just about capital anymore. It’s about bringing operational capability to market,” he says.

“The REIT model, with its embedded execution teams, allows us to manage assets actively and step in if things go sideways. That’s not something financial sponsors can always offer”.

For advisers, selecting the right manager is as critical as selecting the right asset.

Ultimately, the role of real estate in private wealth portfolios is expanding in complexity. Where once it served as a stable, income-producing allocation, it now spans the spectrum from core income to opportunistic growth. The classification, therefore, must follow the characteristics. Those that deliver stable income may sit beside infrastructure or credit, while those that offer capital growth and illiquidity may rightly be considered part of the private equity allocation.

What unites them, perhaps, is their reality.

“In a world where beta is less reliable, targeted real asset strategies can enhance total return while maintaining downside resilience,” Toohey concludes.

The key is to know what you own, where it fits, and what it is there to do. That’s the work of the adviser.

Laurence Parker-Brown

Laurence Parker-Brown is head of content at The Inside Network and managing editor of The Inside Adviser and Investor Strategy News.