Add Some Real Estate To Your Portfolio

With real estate being a part of the capital allocation decisions of both institution and retail investors, there has been increasing development in real estate funds. Due to the capital intensity of real estate investing, its requirement for active management and the rise in global real estate opportunities, institutions are gradually moving to real estate funds of funds to allow for appropriate asset management.

The same is true for retail investors, who now have a much larger selection of real estate mutual funds, allowing for efficient capital allocation and diversification. Like any other investment sector, real estate has its benefits and its disadvantages. However, real estate should be considered for most investment portfolios, and real estate investment trusts (REITs) and real estate mutual funds may be the best methods to fill that allocation.

Real Estate for Institutional Investors
Real estate investment has long been dominated by large investors, such as pension funds, insurance companies and other large financial institutions. Thanks to the globalization of real estate investing and new offshore opportunities, both of which allow for greater diversification and return potential, there is an increasing trend toward finding a permanent place for real estate in institutional portfolio allocations.

The permanent allocation of real estate capital comes with some hurdles. First and foremost, it is capital intensive. Unlike stocks that can be purchased in small increments, commercial real estate investments require relatively large sums, and direct investment often results in lumpy portfolios and inordinate risks in either location or by property type. Real estate also requires active management, which is labor intensive. Managing a real estate allocation requires significant resources relative to traditional investments. As a result of these issues, institutions tend to gravitate toward real estate funds and funds of funds, in order to increase management efficiency and capital distribution. The same advantages that institutions gain from real estate funds can be achieved by retail investors through REITs, REIT exchange-traded funds (ETFs) and real estate mutual funds.

Retail Investors
The following are several ways that retail investors can access the return potential of real estate and obtain exposure to the asset class.

Direct Investment
This strategy relates to investors directly selecting specific properties. The great advantage in this strategy is control. Direct ownership in property allows for the development and execution of strategy and direct influence over return. However, direct investment makes it very difficult to create a well diversified real estate portfolio. The real estate allocation for most retail investors is not large enough to purchase enough properties to diversify and will increase exposure to local property market and property type risks.

Real Estate Investment Trusts (REIT)
REIT shares are private and public equity stock in companies structured as trusts that invest in real estate, mortgages or other real estate collateralized investments. REITs typically own and operate real estate properties. These may include multifamily residential properties, grocery-anchored shopping centers, local retail properties and strip centers, malls, commercial office space and hotels.

Real estate investment trusts are run by a board of directors that conducts investment management decisions on behalf of the trust. REITs pay little or no federal income tax as long as they distribute 90% of taxable income as dividends to shareholders. Even though the tax advantage increases after-tax cash flows, the inability for REITs to retain cash can significantly hamper growth and long-term appreciation. Apart from the tax advantage, REITS provide many of the same advantages and disadvantages as equities.

Because REIT managers provide the strategic vision and make the investment and property decisions, they reduce management issues for investors. For retail investors, the greatest disadvantage is the difficulty in investing in them with limited capital and the significant amount of asset-specific knowledge and analysis required in selecting them and forecasting their performance.

REIT investments have a much higher correlation to the overall stock market than direct real estate investments, which leads some to downplay their diversification abilities. Volatility in the REIT market has also been higher than direct real estate. Explanations for this is due to the influence of macroeconomic forces on REIT values and the fact that REIT stocks are continuously valued, while direct real estate is influenced more by local property markets and is valued using the appraisal method, which tends to smooth investment returns

Real Estate Mutual Funds
Real estate mutual funds invest primarily in REIT stocks and real estate operating companies. They provide the ability to gain diversified exposure to real estate with a relatively small amount of capital. Depending on their strategy and diversification goals, they provide investors with much broader asset selection than can be achieved in buying REIT stocks alone and also provide the flexibility of easily moving from one fund into another. Flexibility is also advantageous to the mutual fund investor due to the comparative ease in acquiring and disposing of assets on a systematic and regulated exchange, as opposed to direct investing which is arduous and expensive. More speculative investors can tactically overweight certain property or regional exposures to maximize return.

Creating an exposure to a broad base of mutual funds can also reduce transaction costs and commission relative to buying individual REIT stocks. Another significant advantage to retail investors is the analytical and research information provided by the funds on acquired assets and management's perspective on the viability and performance of specific real estate investments and as an asset class.

Real estate funds allow investors who do not have the desire, knowledge or capital to buy land or property on their own to participate in the income and long-term growth potential of real estate. Although real estate mutual funds bring liquidity to a traditionally illiquid asset class, naysayers on the use of these funds believe they are not akin to direct investment in real estate.

Home Ownership
Many retail investors who have not considered real estate allocations for their investment portfolios fail to realize that they may already be investing in real estate by owning a home. Not only do they already have real estate exposure, most are also taking additional financial risk by having a home mortgage. For the most part, this exposure has been beneficial and has helped many people amass the capital required for retirement.

The Bottom Line
Although retail investors can and should take into account home ownership when conducting their portfolio allocations, additional, more liquid investments in real estate might also be considered. For those with the requisite trading skills and capital, REIT investing provides access to some of the benefits of real estate investing without the need for direct ownership. For others considering a smaller allocation or for those that do not want to be saddled by asset selection but require maximum diversification, real estate mutual funds would be an appropriate choice.



More From Investopedia

--

Get stories like this on the Yahoo app and discover more every day.
Download it now.
Loading...
  • Deutsche CEO tries to reassure staff as shares plunge
    Deutsche CEO tries to reassure staff as shares plunge Reuters - 16 minutes ago

    FRANKFURT/LONDON (Reuters) - Deutsche Bank's (DBKGn.DE) chief executive sought to reassure his staff on Friday that Germany's largest lender remained robust after its shares again fell to record lows, sending tremors through global financial … More »

  • First Thai babies diagnosed with Zika-linked microcephaly
    First Thai babies diagnosed with Zika-linked microcephaly AFP News - 18 minutes ago

    Thai health authorities on Friday said microcephaly in two babies was caused by the Zika virus, in what is believed to be Southeast Asia's first confirmed cases linking the sickness and the birth defect. The announcement could affect Thailand's key … More »

  • Minimum EPF savings for 55-year-old set to RM228k New Straits Times - 18 minutes ago

    KUALA LUMPUR: The Employees Provident Fund (EPF) has announced that the quantum for the basic savings will be revised from RM196,800 to RM228,000 effective Jan 1, 2017. The amount will be set as the minimum target EPF savings members should have … More »

  • UK funds dump stocks for bonds, emerging markets - Reuters poll
    UK funds dump stocks for bonds, emerging markets - Reuters poll Reuters - 25 minutes ago

    LONDON (Reuters_ - British funds have slashed equity holdings in their portfolios, allocating more capital to bonds and to buoyant emerging markets as they fret about the risks posed by Europe's banks and U.S. elections. The Reuters monthly survey … More »

  • Global funds add to Japan, euro zone bonds, see no further sell offs - Reuters poll
    Global funds add to Japan, euro zone bonds, see no further sell offs - Reuters poll Reuters - 32 minutes ago

    Global investors raised holdings of Japanese bonds to four-year highs in September and bought more euro zone debt, shrugging off a mid-month market sell-off and expressing faith in central banks' commitment to their asset-buying programmes. The … More »

  • Renault signs deal for venture in Iran as its economy opens
    Renault signs deal for venture in Iran as its economy opens Associated Press - 38 minutes ago

    Renault has reached a deal with Iran's government to open a plant making at least 150,000 vehicles a year, as European companies race for a share of Iran's market now that international sanctions have ... … More »

  • HeidelbergCement relaxed about Brexit, had good August in UK
    HeidelbergCement relaxed about Brexit, had good August in UK Reuters - 40 minutes ago

    Germany's HeidelbergCement (HEIG.DE) is seeing strong business in the UK and is more worried about the economic effects if Donald Trump wins the U.S. presidential election than it is about Brexit, its chief executive said on Friday. Britain is the … More »

  • Eurozone inflation doubles as low oil price impact fades
    Eurozone inflation doubles as low oil price impact fades Associated Press - 57 minutes ago

    Inflation in the 19-country eurozone doubled in September to near two-year highs as the impact of lower oil prices began to fade, official figures showed Friday, in a development that's likely to ease ... … More »

  • Revealed: Ex-MaGIC CEO Cheryl Yeoh’s new designation
    Revealed: Ex-MaGIC CEO Cheryl Yeoh’s new designation e27 - 58 minutes ago

    Since leaving MaGIC in December 2015, the public has been anticipating the founding CEO’s next adventure Former MaGIC founding CEO Cheryl Yeoh has been announced as the new director of Flexiroam, a telco company that enables customers to bypass … More »

  • Some relief for big-spending ECB as euro zone inflation ticks up
    Some relief for big-spending ECB as euro zone inflation ticks up Reuters - 59 minutes ago

    BRUSSELS/FRANKFURT (Reuters) - Inflation in the euro zone ticked up in September, data showed on Friday, giving the European Central Bank some confidence its stimulus programme is pulling the bloc's economy away from the deflationary brink. … More »

  • Sainsbury's names Simon Roberts as retail & operations director Reuters - 1 hour 2 minutes ago

    Sainsbury's (SBRY.L), Britain's No. 2 supermarket chain, on Friday named Simon Roberts as its new retail and operations director but may have to wait until July 2017 before he can start. Roberts was most recently executive vice president of … More »

  • YTL acquires three new luxury properties in the UK Business Times - 1 hour 7 minutes ago

    KUALA LUMPUR: YTL Hotels is expanding its luxury portfolio with the recent acquisition of three properties in Edinburgh, Berkshire and London, strengthening the company’s presence within the United Kingdom. The company’s current portfolio in the … More »

  • Japan's Mitsubishi Motors to resume sales after latest cheating scandal
    Japan's Mitsubishi Motors to resume sales after latest cheating scandal Reuters - 1 hour 7 minutes ago

    Japanese automaker Mitsubishi Motors Corp (7211.T) will resume domestic sales of eight vehicle models on Oct. 1, the company said on Friday, after correcting overstated mileage readings in its second cheating scandal this year. Japan's sixth … More »

  • Gold gains as stocks slide on Deutsche Bank worries
    Gold gains as stocks slide on Deutsche Bank worries Reuters - 1 hour 8 minutes ago

    Spot gold was up 0.48 percent to $1,326.41 an ounce by 1005 GMT. Gold has gained one percent so far this month, partly because of the weaker dollar after the U.S. Federal Reserve chose not to raise interest rates. U.S. gold futures were up 0.29 … More »

  • Oil falls as investors cash in on OPEC deal rally, dollar rises
    Oil falls as investors cash in on OPEC deal rally, dollar rises Reuters - 1 hour 9 minutes ago

    Oil prices fell on Friday on a stronger dollar and as investors cashed in on a 6-percent rise in just one day after OPEC members agreed to reduce output for the first time in eight years to stifle a two-year price slide. Global benchmark Brent … More »

  • Renault to enter new joint venture in Iran Reuters - 1 hour 19 minutes ago

    Renault (RENA.PA) said on Friday it had signed a deal to enter into a new joint venture in Iran that would allow it to strengthen its presence in the country after most trade sanctions were lifted earlier this year. In a statement, Renault said it … More »

  • Stock markets tumble on Deutsche Bank strains
    Stock markets tumble on Deutsche Bank strains AFP News - 1 hour 23 minutes ago

    European and Asian stock markets slumped Friday as Deutsche Bank shares plunged on widening concerns over its financial strength, causing ripples of fear across the global financial sector. Bloomberg reported that several hedge funds had withdrawn … More »

  • SE Asia Stocks-Down; Indonesia falls on cigarette tax hike concerns Reuters - 1 hour 28 minutes ago

    By Anusha Ravindranath Sept 30 (Reuters) - Southeast Asian stocks ended lower on Friday with Indonesia posting its biggest intraday percentage loss in over two weeks as the announcement of a tax hike on ... … More »

  • Seven & I Slashes Forecast on Department Store Writedowns (2) Bloomberg - 1 hour 33 minutes ago

    Net income will be 80 billion yen ($793 million) for the fiscal year ending February 28, 2017, about 53 percent less than the 172 billion yen forecast it issued on Aug. 2, Japan’s largest retailer by market value said Friday in a statement. The … More »

  • Airbus Group to merge with planemaking unit
    Airbus Group to merge with planemaking unit Reuters - 1 hour 43 minutes ago

    Airbus Group (AIR.PA) said on Friday it would merge with its planemaking unit, strip out bureaucracy and simplify its brand, marking a break with its complex corporate roots as it prepares for tougher expected competition. Europe's largest … More »

  • RBC cutting 15 investment banking jobs in London - sources
    RBC cutting 15 investment banking jobs in London - sources Reuters - 1 hour 51 minutes ago

    LONDON/TORONTO (Reuters) - Royal Bank of Canada (RBC) is cutting 15 investment banking jobs in London amid a slowdown in activity in the region, sources familiar with the matter told Reuters. RBC Capital Markets, the investment banking arm of RBC … More »

  • BRIEF-Lion Forest Industries enters into a conditional share sale agreement Reuters - 1 hour 52 minutes ago

    Sept 30 (Reuters) - Lion Forest Industries Bhd * Entered into a conditional share sale agreement to acquire from tan sri cheng heng jem about 5.18% of the voting shares in parkson holdings * Deal for total ... … More »

  • EU regulators open to Italy request for more time to sell banks Reuters - 1 hour 54 minutes ago

    Italy has asked for more time to sell four small savings banks it bailed out last year, the European Commission said on Friday, saying it was open to the request. "The Commission is in close and constructive contacts with the Italian authorities … More »

  • UK's IG Group to buy DailyFX from FXCM Inc for $40 million Reuters - 2 hours 6 minutes ago

    IG Group said the deal, which is expected to close by the end of October, would add about 5 million pounds ($6 million) to ongoing operating costs annually and add to earnings from IG's 2018 financial year. IG Group, which has over 152,600 active … More »

  • BRIEF-Boustead holdings bhd proposed disposal of lands by Boustead Petroleum Marketing Sdn Bhd Reuters - 2 hours 15 minutes ago

    Sept 30 (Reuters) - Boustead Holdings Bhd * Boustead petroleum marketing intends to undertake the proposed disposal of two pieces of adjacent lands for compensation of 16.7 million rgt * Proposed disposal ... … More »

 
Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
 
Sign-in to view quotes in your portfolios.

MARKET MOVERS

  • Most Actives
    Most Actives
    NamePriceChange% Chg
    0.152-0.008-5.00%
    N21.SI
    0.12+0.01+12.15%
    40F.SI
    0.115+0.003+2.68%
    40E.SI
    0.113+0.007+6.60%
    43E.SI
    3.97-0.05-1.24%
    Z74.SI
  • % Gainers
    % Gainers
    NamePriceChange% Chg
    0.186+0.025+15.53%
    AWS.SI
    0.12+0.01+12.15%
    40F.SI
    0.164+0.016+10.81%
    40N.SI
    1.35+0.11+8.43%
    U19.SI
    0.475+0.035+7.95%
    NC2.SI
  • % Losers
    % Losers
    NamePriceChange% Chg
    0.36-0.24-40.00%
    AWG.SI
    0.20-0.06-23.08%
    AWI.SI
    0.27-0.03-11.48%
    BQO.SI
    0.30-0.03-9.09%
    5VP.SI
    0.265-0.025-8.62%
    BKA.SI

Market Data

  • Currencies
    Currencies
    NamePriceChange% Chg
    1.36400.000.00%
    USDSGD=X
    1.5239-0.0061-0.40%
    EURSGD=X
    1.7673-0.0008-0.05%
    GBPSGD=X
    74.1860+0.115+0.16%
    SGDJPY=X
    5.6834-0.0006-0.01%
    SGDHKD=X
    3.0308+0.0079+0.26%
    SGDMYR=X
    9,568.2803+25.5674+0.27%
    SGDIDR=X
    4.8918+0.0048+0.10%
    SGDCNY=X
    1.0395-0.0014-0.13%
    AUDSGD=X
  • Commodities
    Commodities
    NamePriceChange% Chg
    1,328.70+2.70+0.20%
    GCZ16.CMX
    19.38+0.19+1.00%
    SIZ16.CMX
    95.01-0.66-0.69%
    ^XAU
    2.20+0.01+0.32%
    HGZ16.CMX
    43.85+0.41+0.94%
    CLV16.NYM
  • Bonds
    Bonds
    TreasuryYield (%)Yield Change
    1.12-0.01
    ^FVX
    1.56-0.01
    ^TNX
    2.28-0.01
    ^TYX