For decades real estate has been an attractive asset for many investors that look for secure returns and high valuations that only keep increasing throughout the years. Many years ago this class used to be exclusive for High-Net-Worth-Individuals, and it mostly still is. However, today, with the increasing middle class around the world looking for more investments, real estate has adapted to their needs, incorporating it to traditional assets (Equity and Fixed Income) to have a diversified portfolio.
What is Real Estate?
When asking people for examples of real estate, the first thing that pops into the mind is a “home," and they are right. According to recent data, just in the US, there were 139.64 million housing units by October 2019. However, the universe of investments is larger than Residentials, as it also covers Commercial RE, Industrial RE, and Land.
The concept of “real estate” includes more than buying a property and/or renting it. Real Estate is defined as a tangible asset and a type of real property, examples include land, buildings, and other improvements, plus the rights of use and enjoyment of that land and all its improvements. Renters and leaseholders may have rights to inhabit land or buildings that are considered a part of their estate, but these rights themselves are not, strictly speaking, considered real estate. Real Estate is part of the Alternative Investments category, along with Private Equity and Hedge Funds.
How to Invest in Real Estate?
The first, and the most evident way is to buy properties directly. However, as this is not Monopoly, purchasing a property for living or renting may take a long time, especially if we take into consideration the high valuations of residential housing around the world.
For those people who want to have exposure to real estate, and do not have the capital to buy properties there are different solutions. In the “The Best Strategy to Invest in Stocks," I explained the concept of an ETF and a Mutual Fund. We also find this concept works for real estate. Here, you will not own a physical home yourself, but instead, you will own shares, whose price will be determined by market conditions, as well as industry variables. You will have the opportunity to decide if you want to be exposed to one specific region (US, Europe, Global) or any specific subcategory (residential, commercial, or industrial).
Over the last 10 years the concept of Real Estate Clubs have increased in popularity. These clubs are made of members who throughout the year are presented with different real estate Investment Proposals, and these members decide whether they want to participate in various investments. If they are in, then they will have an ownership percentage. If they don’t see anything that fits their criteria, they can wait until the next offer. Characteristics of the minimum ticket price or minimum ownership percentage differ from one club to another.
Real estate as an Investment?
Around the world, real estate is not merely considered as a safe asset, but one that shows tremendous price increases from one year to another. First, you have the continuous cash flows you get when you rent a property you own. Whether you do it on your own, or you have a third party involved in the due diligence process, the chances of default here have been (until coronavirus) very low. Residential real estate cash flows usually are updated once every year, which makes it very dependent on the price of the underlying asset. For commercial real estate, the contracts are for 5-year periods, and despite the fact that brick and mortar are supposed to have more difficulties, the prices only keep increasing.
On the other hand, we have high valuations. Most of the buildings and constructions are concentrated in the Top Tier cities or Capitals. With regulations around the world preventing the construction of high skyscrapers where needed, individuals and real estate agencies want to take part in the juicy returns when the demand overpasses the supply.
How Coronavirus will impact real estate?
Understanding the consequences on the industry are extremely hard to assess at this point. However Governments around the world have taken measures to protect both owners and tenants. Recent research shows that “80% of would-be-buyers have either delayed their housing search or stopped it altogether” and “60% of those surveyed cited concerns over their future employment prospects and 54% talked about the inability to see homes in person as the main driver for their hesitance to buy in this market.” As for the lack of in-person-meetings, many real estate agencies had gone digital, providing this service for potential buyers.
There is a clear detractor in the industry so far. Due to mobility restrictions, it does not seem to be a good year for hotels and tourism. However, every challenge brings an opportunity, and stronger due diligence will be needed in all subcategories across real estate.
In conclusion, real estate has typically been a safe asset to invest in. This will likely not change because of coronavirus. At least I don't see it that way. Demand will rise again, and opportunities will be available for the future in an industry that has proven to be resilient.
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