Companies and organisations are constantly looking for ways to increase efficiency and maximise profitability. Utilising assets and capital in the corporate sector requires a firm’s management to invest it in ways that would generate the highest wealth for the company’s shareholders. With real estate becoming a big part of the institutional and retail investment portfolio, growth in products like real estate investment trusts (REITs) and real estate mutual funds are providing business managers with high enough incentives to invest in real estate (Gill, 2014). Due to the capital-intensive nature of real estate investing and its high requirement for asset management, growing real estate opportunities are making organisations look into real estate funds (Chen, 2020). The retail investor is also open to a much larger selection of real estate mutual funds allowing for efficient capital flow and portfolio diversification. Therefore, real estate must be considered an important part of an organisation’s investment portfolio. Continue reading to understand how the corporate sector can include real estate in its investment portfolio.
Why should corporate and retail investors invest in real estate?
What are the barriers to investing in real estate?
What strategies can be used by corporate and retail investors for investing in real estate?
Understanding the Barriers to Real Estate Investing
The real estate investment landscape has a large portion of pension funds, insurance companies, and other big financial institutions. In the aftermath of globalisation, real estate has become a far more accessible asset class, which allows for greater diversification of stakeholders in the arena. It can be seen that more and more companies are adding real estate to their investment portfolios. However, allocating funds towards real estate can have its challenges. Firstly, it is a very capital-intensive venture compared to the stock market, which can be purchased in small quantities and tends to be very liquid (Forbes, 2020). Commercial and residential real estate requires substantial upfront deposits, whereas direct investments in these two can be lumpy and illiquid based on location, risk, and property type. Secondly, real estate investment portfolios require active management and maintenance. This process can be costly, and compared to managing traditional investments, managing a real estate mutual fund requires significant resources, expertise, and planning. Due to these issues, institutions have started to gravitate towards real estate mutual funds and funds of funds (FOF). Private investors also can invest in real estate investment trusts that provide the much-needed liquidity and exemption from state taxes on profits. These funds can also be exchanged using exchange-traded funds (ETFs) (Frankel, 2020).
Corporate and Private Sector Strategies for Investing in Real Estate
There are multiple strategies that corporate and private sector investors can employ for investing in real estate. Direct investment strategy involves directly purchasing selected properties as investments. This can include properties that generate rental income or can be based on an increase in market value. The advantage of employing this strategy is having control and direct ownership of the property, which allows for the development and execution of personal strategies. However, as direct investments are restricted by investment capacities, it becomes exceedingly difficult to create a well-diversified real estate portfolio. Furthermore, it also involves additional costs such as landlord costs, risks, and management tasks (Formigle, 2016).
Another strategy that retail investors can employ is called homeownership. Many investors already own a home and have substantial exposure in the market. However, the method involves taking on additional risks in terms of a home mortgage. This can also be beneficial as it allows for amassing capital for further investments by building a strong credit rating. Real estate investment trusts (REITs) are another investment strategy that represents private and public equity in companies structured as trusts that invest in real estate, mortgages, or other collateral. REITs own, operate, and manage properties which can include multifamily residential properties, shopping centres, local retail properties, malls, commercial spaces, offices, and hotels. REITs are also run by managers that take decisions on behalf of the trust. They provide strategic vision and make property-related decisions, removing the burden from the investor (Nareit, 2021).
Furthermore, another option for corporate and retail investors is to invest in real estate mutual funds and funds of funds. Real estate mutual funds invest in REITs and other real estate operating companies using professional portfolio managers and expert researchers. They allow for a diverse investment portfolio with a relatively small amount of capital. Along with this, they also provide mobility in moving from one fund to another with relative ease. This flexibility is also important because a mutual fund investor can acquire and dispose of assets on a systematic and regulated exchange instead of direct investing, which has many additional costs involved. Analytical research information provided by funds on acquiring the asset can also be helpful for the investor in making decisions for future ventures. Subsequently, a fund of funds (FOF) is a multi-manager investment that invests in other funds. Its portfolio contains different underlying investments that directly replace investments in stocks, bonds, and other securities.
Purchasing a real estate asset is only half the process of making a profit on an investment. Once a property has been purchased, it needs to be stabilised according to market conditions for it to sell at a higher price. Construction and restoration are two main processes used to enhance a property, after which it needs to be stabilised. Stabilisation includes getting tenants on a property, getting the right market rent, getting the right occupancy levels, and factoring in other key performance indicators for properties. Once the property has been stabilised, it needs to be listed on an online property portal or with real estate agents or brokers. Exiting is the last stage of an investment and is often related to making the sale and evaluating the key investment indicators such as internal rate of return and net profit income. Following this four-step strategy covered in our blog series can ensure a safe and reliable investment method for investing in real estate.
- Utilising assets and capital in the corporate sector requires a firm’s management to invest it in ways that would generate the highest wealth for the company’s shareholders.
- With real estate becoming a big part of institutional and retail investment portfolios, growth in products like real estate investment trusts (REITs) and real estate mutual funds are providing business managers with high enough incentives to invest in real estate.
- The retail investor is open to a much larger selection of real estate mutual funds allowing for efficient capital flow and portfolio diversification.
- Real estate investment landscape has a large portion of corporate organisations like pension funds, insurance companies, and other big financial institutions.
- In the aftermath of globalisation, real estate has become a far more accessible class of asset, and this allows for greater diversification of stakeholders in the arena.
- Real estate is a very capital-intensive venture compared to the stock market, which can be purchased in small quantities and tends to be very liquid.
- Real estate investment portfolios require active management and maintenance.
Chen, J. (2020). Fund Of Funds (FOF). Retrieved from https://www.investopedia.com/terms/f/fundsoffunds.asp
Forbes. (2020). Is It Just A Myth That Real Estate Is A Better Investment Than Stocks? Retrieved from https://www.forbes.com/sites/kristinmckenna/2020/02/21/is-it-just-a-myth-that-real-estate-is-a-better-investment-than-stocks/?sh=1c3ae90c1808
Formigle, I. (2016). What are the Differences Between Direct and Indirect (REIT) Real Estate Investments? Retrieved from https://www.crowdstreet.com/resources/topics/investing/direct-indirect-investing
Frankel, M. (2020). REITs vs. Real Estate Mutual Funds: Which Is the Best Way for You to Invest? Retrieved from https://www.millionacres.com/real-estate-investing/reits/reits-vs-real-estate-mutual-funds-which-is-the-best-way-for-you-to-invest/
Gill, S. W. (2014). Alternative Investments. Retrieved from https://www.cfainstitute.org/-/media/documents/support/programs/investment-foundations/12-alternative-investments.ashx
Nareit. (2021). What’s a REIT (Real Estate Investment Trust)? Retrieved from https://www.reit.com/what-reit#:~:text=REITs%2C%20or%20real%20estate%20investment,number%20of%20benefits%20to%20investors.