The following is a portion of our upcoming “white paper” that will be released shortly on our website entitled Investing in Real Property which will discuss this asset class in fuller detail.
The definition of real estate is "land and the buildings on it, along with its natural resources such as crops, minerals, or water;” which form part of an asset class known as “real assets” that includes things such as commodities, infrastructure, bullion and natural resources. “Real assets” tend to be grouped together because they are long-term and physical in nature.
During the past couple of years, Canadians have become familiar with investing in Real Estate Investment Trusts (REITs) that trade on the public markets like a stock, as retail investors have bought these REITs in a search for yield. These public REITs may be good options for retail investors who do not have the capital to access private partnerships, but investment in private real estate may provide superior risk-adjusted returns and opportunities that are not available in the public marketplace.
Historically, pension funds along with insurance companies and foundations, were the first to utilize private real estate investments, as they provided an inflation hedge and diversification to their portfolios. More recently, wealthy families came to realize that real estate should form part of the core of their overall investable portfolio as well.
One of the favourable attributes of real estate is that it does not fluctuate based upon the stock market and therefore provides a diversifying effect on a portfolio. Because of the illiquidity (long-term nature) of real estate, it is more difficult for investors to make emotionally driven buy and sell decisions such as they do with stocks. As a result, this asset class exhibits greater stability and therefore is less correlated to the remainder of the portfolio.
Real estate also acts as an inflation hedge, like other real assets such as commodities. Stocks may provide some inflation protection if they can pass along increased costs to their consumers. Bonds, on the other hand are not an inflation hedge, as their value declines when inflation or interest rates increase. Having real estate in a portfolio will offset the effects of inflation over time, preserving purchasing power.
Real estate is a management intensive business that requires a specific skill set in sourcing, buying, financing and operating properties. Due to this unique nature, it is critical when evaluating investments in this sector, that a great amount of dedication be applied to the due diligence process, in order to evaluate the manager’s abilities and skills to execute their plan.
To learn more on how real estate should play a role in your investment portfolio, we would welcome the opportunity to discuss this option, as well as others, in further detail.