What you need to know about real estate investing

Investing in real estate is one of the oldest forms of investing. Predating modern stock markets, property is an alternative asset class which investors can add to their portfolio to achieve better diversification beyond combining traditional asset classes such as bonds and equities. For some investors, the fact that real estate is a tangible asset class, is a big attraction too.

Different types of real estate investments.

There are different types of property or real estate – there is residential, including homes and apartments and commercial property, the latter of which includes the likes of office buildings, retail parks, shopping malls and industrial buildings such as manufacturing facilities and warehouses.  

Why invest in a real estate fund?

There are two main sources of return of any real estate investment:

Rental income and Capital growth.

While many people aim to buy their own home, or even a buy-to-let property, purchasing a commercial property is generally not within many people’s reach. However if you want to own (part of a) property, commercial or otherwise but don't have piles of cash and don’t want the hassle of being a landlord, a real estate fund might be a solution for you. Real estate funds generally work like this - investors with the same objectives, pool their money together and buy shares in a set investment portfolio that invests according to a pre-set objective. Professional portfolio managers then invest this collective sum into various sources of real estate.

What is a property fund?

Real estate portfolios generally come in two different guises - those that invest directly in buildings and those that invest in the shares of groups in the property sector. 

The former type, also referred to as bricks and mortar-funds, offer investors the opportunity to invest their money across a wide spread of properties and the rents can provide a decent income stream, while investors can also benefit from any capital appreciation. However these portfolios need a good cash buffer to handle investor redemptions, which means a significant chunk of their money is not invested, depressing overall returns. Property can be quite illiquid i.e. hard to sell as it generally takes time to find a buyer and if a property needs to be sold quickly, its value might drop.

The latter type of fund, those that invest in the shares of property companies move more like a traditional equity fund and while they can offer the potential for higher capital growth, because they are pure equity investments they tend to be more volatile than funds that invest directly in buildings.

What drives the value of real estate?

Supply and demand for space is an important driver of property values, as it affects rental rates. The location and quality of the property is another determinant of value as prime properties tend to attract the largest rents. Further, the creditworthiness of the tenant also affects the price of a property. If the tenant fails to meet its rental obligation, the owner’s cost will rise, hence affecting the value of the real estate.