Alternatives: Real Estate

In the context of alternative investments, real estate is commonly focused on commercial and other income-generating properties.

The major segments are land, offices, multifamily residential dwellings, hotels, and retail and industrial properties.

Land

Undeveloped land can be highly speculative because there are no cash inflows from tenants or occupants. There are only cash outflows in the form of real estate taxes and other costs of holding the land.

But with improvements like approved building permits, roads, and utilities, land value rises based on projected future cash flows. Investing in undeveloped land is risky because values can decrease rapidly when demand falls.

Offices

Offices have historically represented one of the largest segments of commercial real estate.

They are usually owned by real estate investment companies that lease space on short-term monthly leases to longer multiyear leases.

Office rents typically go up with inflation, which makes offices attractive for those seeking to protect their income against inflation.

Multi-family

Also known as apartments, multifamily residential dwellings represent a significant portion of the real estate market.

They are commercial properties that contain multiple units within a single property or development. These units are rented to individuals or families, with most leases being for periods of one year or less. This makes the multifamily residential dwellings segment sensitive to supply and demand.

Retail, Industrial, and Hotels

The retail real estate segment includes shopping malls, commercial shopping centres, and other buildings designated for retail purposes. Space is leased to retailers with lease terms varying from weeks to years.

The industrial real estate segment includes manufacturing facilities, research and development space, and warehouse and distribution space.

Hotels include branded short-term stay facilities and longer-stay facilities catering to contract workers in remote locations, as well as boutique and independent facilities.

Depending on the country, there may be other commercial real estate segments. For example, seniors’ housing, assisted living facilities, and student housing are popular alternative investments.

How do you Invest in Real Estate?

If you have enough money, you can buy alternative categories of real estate directly, of course.  But most investors gain exposure to real estate through pooled funds.

Real estate pooled funds typically hold investments in hundreds of commercial properties. These properties are diversified by geography and property type.

Real estate investment trusts, called REITs, are pooled investments sold on public markets. Like other equity securities, the shares of REITs are traded on exchanges, which gives you liquidity.

REITs are companies that own real estate, and often develop the land, construct the buildings, and manage the properties.

Some investors allocate a portion of their portfolios to alternatives in the form of real estate for the diversification benefits.