May 24, 2015

In our Cytonn Weekly report #18, we spoke about how investors typically invest in well-known and liquid asset classes such as money markets, equities and fixed income, collectively referred to as “traditional investments” or “public markets”. There exists an alternative to these traditional investments in private equity, real estate and structured products. Last week, in our Cytonn Weekly report #19, we demystified structured products, and this week we explain real estate investments.

While relatively illiquid and more complex, alternative investments are essential to an investment portfolio for 2 reasons: First, they offer higher returns. Second, the returns are more stable and uncorrelated to more volatile returns such as equities. For example locally, real estate has registered the highest returns over the last 5 years, at 24% p.a., as compared to traditional markets, as can be seen in the graph below.

Average per annum 5-Year Return per Asset Class

There are two ways to access real estate in any market:

1. Brick and mortar: this is the development of a building or the purchase of a parcel of land, hoping to benefit from future capital appreciation and rental income. The pursuing of this option comes with a lot of risks – such as title risk, construction risk, expertise and execution risk. The pursuit of real estate returns through direct purchase of land, buildings and construction should ideally be left to those with real estate experience and expertise. 
2. Real estate investments: this is the conversion of the physical real estate asset, such as a home, office tower or hotel, into a liquid investable product. Investments into real estate can either be public markets tradable like REITs or privately placed. Privately placed products allow investors to access real estate investments such as mezzanine, real estate structured notes, and equity investment instruments that are not in the public domain.

Depending on the investors’ investment needs, risk/return profile, time horizon and liquidity needs, there are a number of investment options available. Such investments are: