Real Estate’s Enduring Qualities, Part 2
October 25, 2018 | Beth Glavosek | Blue Vault
From time to time, it’s good to revisit the basics about why commercial real estate (CRE) makes sense for many investors.
CRE is broadly defined as any property that can produce income. The most common categories of CRE include office, retail, industrial, medical, hospitality, multi-family, land, and other leasable commercial space.
In addition to providing diversification benefits for investor portfolios, real estate can deliver capital appreciation, current yield, and inflation hedging.
Capital Appreciation
Picture your own house and the potential for selling it for more money than you paid for it. CRE also offers the opportunity to invest in a hard asset that can increase in value. A real estate fund will receive capital appreciation if it sells the properties at a higher price than it paid for them. Investors may receive these gains when they sell their shares at a higher net asset value (NAV) or the fund reaches a liquidity event.
Current Yield
Real estate is considered by many to be an “income play.” Because real estate portfolios usually pay dividends, investors can expect to be paid quarterly or they can reinvest the dividends to purchase additional shares. With interest rates having been at or near historical lows for an extended period of time in recent years, traditional income-based investments such as investment grade corporate or municipal bonds haven’t provided the current income that many investors need. Real estate, as a complement, can fill that void.
Inflation Hedging
Real estate has a strong track record as an inflation hedge because its values and rents go up as inflation rises. Tenants who sign long-term leases generally have rent escalators built in so that rental income can keep pace with inflation. Standard lease terms also protect landlords from increasing costs because tenants usually pay expenses such as utilities, insurance, and maintenance. Shorter-term rents can be reset to market levels.
In short, with real estate’s “total return” emphasis (the opportunity for appreciation plus income), it can be an attractive and important part of many investors’ portfolios.
