Why consider Real Estate?
In the current environment, Real Estate is one of the most promising areas of opportunity for investors looking to diversify a portfolio of poorly-performing stocks and bonds. Unlike many other types of investment, it is also something most people feel somewhat familiar with, as many of these people have purchased houses and all of them have , at least, lived in one!
Although the opportunity is genuine, the real estate market is complex, and a thorough knowledge of the options is required before committing capital to this unique asset class. We’ll examine these options in more detail below.
What is Real Estate?
At a basic level, Real Estate refers to buildings and the land on which they are built.
Investing in real estate offers a distinct set of advantages. Returns can come in the form of both cashflows (from rental properties) and value appreciation. Real Estate is also regarded as a hedge against inflation, and displays a relatively low (in some cases negative) correlation with stocks, bonds, and commodities. Depending on the jurisdiction, tax benefits may be available to enhance returns further.
Managing properties is time-consuming, however, and transaction costs are high. In particular, valuing land and property can be more difficult in comparison to liquid investments like public stocks. As with standard securities, the value of real estate is based on expected returns and level of risk. Factors such as the quality (e.g. location, length of lease) of the property and its management, as well as the amount of leverage used to acquire it, will determine both.
Real Estate in 2022
Owner-occupied, residential properties constitute the majority of the real estate market as a whole. In the US, sales prices of new homes climbed steadily in the five decades leading up to the financial crisis in 2008[1], and despite a temporary dip, have nearly doubled since then[2].
The decline in real estate during the financial crisis was driven by lax lending policies and poor-quality residential mortgage debt, neither of which apply today.
The continued rise in home prices combined with slower economic growth may well impact residential real estate. However, this correction may well be temporary given the ongoing housing shortage. Meanwhile, funds investing in commercial real estate enjoyed a bumper year in 2021.[3]
Going forward, economic and social changes will undoubtedly affect some sectors more than others. E-commerce, for example, may be less likely to favor traditional office space. In other words, project selection remains key.
Investing in Real Estate
Real estate can be divided into direct and indirect.
The direct approach is for an investor to purchase a property, typically with a combination of cash (deposit) and a loan (mortgage). One can then use rental proceeds to pay down the loan, make significant improvements to the property, or aim to sell it quickly (“flip”) to another investor after a rapid price appreciation.
The direct or “DIY” approach is open to all, but it can be risky and draining. Even doing it “on one’s own” it still requires the involvement of supporting parties (e.g. attorney, appraiser). It also limits opportunities to those within the individual’s financial and geographic reach.
The indirect method, on the other hand, involves contributing capital to a fund, managed by professional investors specializing in real estate. As well as benefiting from this dedicated expertise, a large real estate fund can invest in multiple sectors and markets, and so help to diversify the risk.
As in private equity, real estate funds can follow different strategies to generate a return for their investors. Some focus on ‘core’ opportunities, selecting high-value properties with dependable rental streams. Other funds may pursue a ‘value-added’ approach, purchasing properties with the intention of increasing their value through development.
Strategies that look to increase the value of a property through development are inherently riskier as success is partly dependent on third parties (e.g. suppliers, regulators). However, all strategies require expertise and professional judgment, and one may find having an experienced team with a solid track record entrusted with the task highly beneficial.
How Petiole Can Help You
In the past, investors looking to access the expertise of top-performing real estate funds had relatively few options, and were forced to look elsewhere. Alternative ways to gain exposure to real estate include publicly-traded funds (e.g. REITs), as well as newer methods such as crowdfunding websites (e.g. Prosper, Lending Club).
At Petiole, we offer you access to the best-performing real estate funds without having to commit large sums of capital up-front. This means that higher returns are possible without the need to take on more responsibility or higher risk (or both).
Get in touch with one of our advisors to discuss your goals, and we’ll help you find out if real estate could help you achieve them.
Disclaimer
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