Investing in Real Estate
Real estate, normally in the form of commercial or industrial property, is an asset class that has long been used by institutional investors. Over the long-term real estate investment has demonstrated an ability to deliver returns that at least match inflation. Proponents of real estate investment claim that it offers much more stable returns than equities and that its returns are not highly correlated with equity returns. We are extremely sceptical of such claims since they arise from the fact that real estate is not traded on a minute-by-minute basis and hence valuations tend to be infrequent and based on transactions that may not reflect current supply and demand patterns.
Notwithstanding our scepticism we accept that real estate offers some attractive characteristics and, in particular, that income from a well-diversified property portfolio may be more stable than equity dividends in times of economic stress. Most private investors, however, do not have the resources available to build a well-spread portfolio of direct properties and, accordingly, must rely on property funds or companies to obtain exposure.
There are a number of ways in which to gain real estate exposure including Channel Islands-based funds, Real Estate Investment Trusts (REITs) and quoted property development companies. Each type offers slightly different characteristics but REITs probably replicate most closely the types of returns that an investor in direct properties could achieve.