Strategic Real Estate Allocation: Keep It at 10-15% of Your Portfolio in 2026

As investors reassess their asset mix for 2026, real estate is emerging as a strategic yet measured component of diversified portfolios. According to Abhishek Khudania, Senior Executive Director – Wealth at Client Associates, property should remain a satellite allocation, not a dominant holding—ideally capped at 10–15% of one’s overall portfolio.

With liquidity, diversification, and institutional-grade management becoming increasingly important, REITs and other professionally managed structures are set to play a bigger role in driving stable income and yield enhancement.

In a landscape where equities continue to lead long-term wealth creation and fixed income provides essential stability, real estate’s value lies in complementing—not competing with—the core pillars of an investor’s financial strategy, Khudania told Kshitij Anand of ETMarkets. Edited Excerpts –

How should investors think about allocating capital to real estate within a diversified portfolio in 2026? What percentage of one’s portfolio should ideally be in real estate—especially for those already exposed through fractional property ownership or REITs?

In 2026, allocating capital to real estate should be aligned with one’s financial goals and overall portfolio strategy. Real estate continues to be a part of long-term portfolios alongside equities and fixed income, offering stability and dual returns through both capital appreciation and rental yields.

The right approach is a balanced one, equities for growth, property, and debt for stability. Real estate should ideally remain a satellite allocation, enhancing yield and diversification rather than forming the portfolio’s core. For most investors, maintaining around 10-15% exposure to real estate is reasonable. A larger share of this exposure can come through REITs and other professionally managed structures, which provide steady income, liquidity, and institutional quality diversification, though they currently remain more commercial property focused.

Physical residential property continues to hold emotional and lifestyle significance for most investors. However, given its illiquidity and higher holding costs, it should complement, not dominate your overall investment mix. As trends are now changing, we are seeing increasing financialization of direct real estate properties. Going much beyond a total of ~15%, particularly in direct property, can reduce flexibility and increase concentration risk.

How does real estate compare with equities and fixed income in terms of risk-adjusted returns in the current macro environment?

In India’s dynamic investment landscape, equities have continued their dominance with historical returns of 12-15% per annum over the last two decades, far outpacing both fixed income and real estate. Fixed income assets, including government bonds and AAA-rated debt, typically deliver 4-7% annual returns with lower volatility, but lack the compounding power and upside of stocks.

Real estate, on the other hand, averages 6–8% annual returns over the long term, with select REITs giving approximate 12% returns. These may be enhanced with the use of leverage in the current macroeconomic environment of low interest rates. Yet, property assets face added complexities such as illiquidity, concentration risks, opaque valuations, and hidden costs, while equity portfolios benefit from instant liquidity and broad diversification.

For HNIs, real estate’s role should be seen as a strategic diversifier and source of inflation-hedged income rather than a lead generator of compounding wealth.

How are rental yields and capital appreciation prospects evolving across metro vs. tier-2 cities?

As India's metro cities become increasingly saturated and developed, the pace of growth for residential properties has slowed, with rental yields in Mumbai, Delhi, and Bengaluru now plateauing. In contrast, Tier-2 cities like Pune, Surat, Indore, and Jaipur are experiencing dynamic expansion, with improved office infrastructure, rising disposable incomes, and government incentives propelling both commercial and residential real estate.

This environment has led to rental yields in Tier-2 hubs surging and capital appreciation in select micro-markets surpassing 12-18% per year, driven by infrastructure upgrades, IT investments, and strong migration flows. For astute investors, the evolving landscape in Tier-2 cities is opening opportunities for superior income and long-term growth, as these regions transform into new economic powerhouses where real estate returns increasingly outpace their metro counterparts.