Has real estate joined the other major assets classes?

It doesn’t seem so long ago that when mentioning assets classes we thought of stocks and shares, bonds and probably cash – real estate never got a look in! That has changed massively in the last couple of decades with real estate now becoming one of the mainstays of many investors portfolios. It offers a great alternative to the other three types of assets, adds diversification to our portfolios and has performed admirably over the long term.

Why has everything changed?

The demand for rental properties has been increasingly steadily for some time, as a result the number of people wishing to become landlords has also increased – not surprisingly when most assets classes are only offering low single figure returns. In many countries around the world, young people are struggling to get onto the property ladder. Their only hope of their own home is to rent with the hope that this gives them the opportunity to save.With demand getting higher it naturally means that prices go up, meaning returns are higher, but unlike most other investments, the risk actually gets lower when the returns increase. Real estate is in the unique position of being in finite supply so prices will always increase. The means that along with generating a yield, investors also see capital growth and can be confident that this will be the case over the medium to long term.

To give you a true indication of how much influence real estate has on the US economy, in 2014 it made up 13% of US GDP. This gives you a true indication that this investment has now joined the more traditional “major assets classes”.

Is there a downside to real estate?

All investments have their pros and cons and indeed real estate is no different from the other types of investment. The major downsides for many investors is the initial cost and the fact that it is largely illiquid. However, bonds and stocks and shares are far more liquid but they suffer from greater fluctuations than more illiquid assets so it is definitely important to consider real estate as PART of your investment portfolio and not all of it.

Like the advice with all investments, diversification is what is really needed and remembering that it is important to split your portfolio.

Where are the institutional investors putting their funds?

According to the Cornell/Hodes Weill Allocation Monitor, there has been a notable shift towards real estate in recent years. As recently as 2013, 8.9% of institutional investor’s portfolios was made up of real estate but this had jumped to 9.56% by the end of 2015 (the last figures available), an increase of 66 basis points, a hugely significant jump that amounts to US$462 billion.

The significance of this is that the institutional are like bookmakers and rarely wrong. If they believe that this is an area where they will get greater return, then it is well worth sitting up and listening. As the old saying goes, “if it’s good enough for them”, then its good enough for you!

What does the future hold for real estate?

In the past real estate has only really been held back from becoming a core asset because it was hard for regular investors to access it. Physical real estate is expensive and up until recently property funds were hard to access but with the advent of the internet it has created the same opportunities for private investors to act in the same manner as the institutional investors. Real estate is now open to a far broader portion of the population than it was even a decade ago.

Just has been the case with the institutional investors, property will start to play an increasingly larger role in individual’s portfolios in the very near future. If you would like to know more about the opportunities within real estate, why not contact Emerging Trend Advisors today?


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