Real assets such as real estate, infrastructure, natural resources can provide diversification benefits and inflation hedging capabilities for an investment portfolio. Investors can gain exposure to real assets through direct ownership, private funds, or publicly traded securities like REITs. When evaluating real asset investments, investors should assess factors like management expertise required, liquidity, leverage use, and risk-return profile. A prudent real assets allocation improves portfolio efficiency while moderating overall risk.
Real estate has high unit value and needs active management
As a real asset, real estate has some unique features like high unit value, fixed location, management intensiveness etc. Investing in direct property ownership requires substantial capital and real estate expertise to evaluate deals, manage properties etc. REITs open up real estate investing to more investors by providing liquidity, transparency, diversification through owning shares in a portfolio of properties.
Private real estate funds tap specialized expertise
Compared to individual direct ownership, private real estate funds can provide the benefit of specialized real estate and investment expertise for activities like deal sourcing, due diligence, property management, exit strategy. Funds also aggregate capital from multiple investors to undertake bigger projects and aim for diversification across different property types and geographical locations.
Public securities differ in risk-return profile
Within public real estate securities, REIT shares, being equity ownership, generally have higher expected returns but also higher risk than REIT debt or mortgage backed securities. REITs and REOCs have more flexibility than strict REIT requirements to undertake value-add activities like property development. So their returns tend to be more volatile than core property focused REITs.
Allocation to real assets for diversification, inflation hedge
In an investment portfolio, adding alternative assets like real estate, infrastructure, natural resources can provide diversification relative to traditional stocks and bonds. Investors should assess their liquidity needs, ability to tolerate leverage risk, expected risk-adjusted returns etc while determining an appropriate strategic allocation to real assets.
Real assets like property and infrastructure provide portfolio diversification and inflation hedging ability but require evaluation of factors like liquidity, leverage, expertise requirement before deciding appropriate investment vehicles and strategic allocation.