Alternative real estate investments refer to non-traditional real estate assets beyond residential and commercial properties. They provide investors diversification benefits for their real estate allocation. Typical examples include real estate funds, REITs, infrastructure, farmlands and timberlands. Investors may access them directly or through fund vehicles. The rationale lies in their distinct risk-return profiles owing to niche focus and relative illiquidity. However, adequate due diligence is necessary given their complex nature.
Adding Alternative Real Estate Assets Enhances Portfolio Diversification
The context articles mention several major alternative real estate categories – real estate funds, REITs, infrastructure, farmlands and timberlands. Investing in them can enhance overall portfolio diversification versus only holding physical properties. For instance, real estate funds provide professional management and access to assets like hotels, storage facilities beyond what individual investors can access. REITs offer liquid real estate exposure and dividend income. Infrastructure assets like roads and airports have monopoly characteristics, generating stable cashflows. Farmlands and timberlands provide inflation protection as commodity prices appreciate over time. Blending alternative real estate with conventional real estate leads to differentiated return streams, cashflows and risks.
Complex Due Diligence Is Critical Despite Attractive Attributes
While alternative real estate investments pose diversification benefits, they differ substantially from physical real estate and require more complex due diligence. For instance, real estate funds come with various fees like management fees and carried interest. Investors need to analyze fee structures to determine reasonableness. For REITs, financial metrics like NAV per share encompass intricate calculations with multiple adjustments. Familiarity with metrics like FFO and AFFO is also needed to value REITs. For other alternatives like infrastructure and timberlands, deep understanding of respective industries is a must. Their cashflows derive from distinct levers like traffic volume and harvesting rates. Without diligent underwriting, investors risk mis-evaluating return potentials.
Alternative real estate investments like funds, REITs, infrastructure, farmlands and timberlands enhance portfolio diversification. But their niche focus also demands more rigorous evaluation of specialized risks factors beyond physical properties.