Understanding Alternative Investment Assets in Detail

Real estate has been a part of our story since the dawn of time. It began with caves, evolved into huts, and now we’re crafting homes and skyscrapers with materials far beyond what our ancestors could imagine. But often, we only see real estate as a backdrop to our lives — places to live and work.

Yet, there’s more to it. Real estate isn’t just about setting up a home or an office. It’s a time-honoured asset, steeped in history, and ripe with potential for growth.

In this chapter, we’re going to understand how these bricks and mortar (or caves and huts, if you will) can be more than just shelters. They’re opportunities to build wealth, to invest in something tangible that stands the test of time.

This one’s a no-brainer — Real estate, in its essence, is all about space and what fills it — be it land, buildings, or even the natural resources that come with it. This includes everything from cosy homes to sprawling commercial complexes and everything in between.

But there’s more to real estate than just bricks and mortar. It’s a tangible asset, one that provides a unique combination of capital growth, income and a way to balance financial risks.

When we talk about investing in real estate, we’re not just talking about buying a house or a piece of land. It’s a whole world of opportunities, with various ways to get involved, like public trusts, private funds, or direct purchases. The scope here is broad, encompassing buying, owning, managing, renting, and selling properties with an eye on profit.

However, the depth of this field goes far beyond these basic actions.

Now, let’s paint a picture: imagine a forgotten warehouse district on the city’s edge. Overgrown, neglected, and maybe even a few squatters here and there. It looks like a place time forgot. But wait, what if you see what others don’t?

Imagine turning this desolate area into a bustling business hub. That rundown district could skyrocket in value. And it’s not just about the buildings. It’s about starting a ripple effect. Businesses draw people, and people draw more businesses. Before you know it, this once-forgotten place could transform into a vibrant, thriving community.

That’s the magic of real estate. It’s not just about the land or structures; it’s about potential, transformation, and creating value where none existed before.

Ways to invest in Real Estate

1. Direct Investing

   This is the most hands-on way to invest in real estate. It involves purchasing a property directly. This could be residential properties like houses and apartments, or commercial properties like office buildings or retail spaces. As a direct investor, you own the property outright, which means you’re responsible for its maintenance, tenant management, and all the financial aspects like mortgage payments, property taxes, and insurance. The advantage here is the potential for direct income through rent and the opportunity for capital appreciation.

2. Indirect Investing

   (a) Mortgage-Backed Securities (MBS):

   These are investments in mortgages. Basically, when people take out mortgages to buy homes, these mortgages can be bundled together and sold as securities to investors. The return on these securities comes from the mortgage payments made by the homeowners. MBS can offer regular income, but they also carry risks, including the risk of default on the underlying mortgages.

   (b) Real Estate Investment Trusts (REITs):

   REITs are companies that manage various real estate properties. By investing in a REIT, you’re essentially buying a share of a portfolio of real estate assets. This can include a variety of properties, from apartments and shopping centres to hotels and hospitals. They’re popular for high dividends and are traded like stocks on major exchanges like BSE and NSE.

   (c) Private Real Estate Funds

   Private RE funds are professionally managed investment vehicles that invest in real estate. This requires quite a large amount of capital and may be available only to HNIs or other institutional investors.

Types of Real Estate Investments

• Residential Properties: These include single-family homes as well as larger apartments.
• Commercial Real Estate: This category covers office buildings, retail spaces, shopping centres, and hotels.
• Industrial Real Estate: Warehouses, factories, and distribution centres fall under this.
• Land Development: Involves purchasing undeveloped land for future development or sale.

The table below shows the global private deal volume across the last 12 years in the different areas of real estate. All the figures mentioned are in $ billion.

Real Estate stands out in the investment landscape because it’s something you can literally stand on. Unlike stocks or bonds, it’s tangible, something you can see and touch. This adds a reassuring solidity to your investment. And there’s a constant need for it — people always need places to live and work, keeping the demand for real estate alive.

The only big question is, where will that demand arise?

When it comes to real estate, the phrase “location, location, location” has never been more true. It’s like a real-life treasure hunt, where finding the right spot is half the battle. The worth and future potential of a property are deeply tied to where it’s located, shaping its demand and growth prospects.

Let’s consider, for instance, that you’ve put your money into a commercial property in an emerging neighbourhood on the city’s outskirts. It’s a bet on the future, and you’re confident this area will boom.

Now, once you’re invested, there are two main ways to generate returns — rental income and capital appreciation. Whether you’re in a private fund or in a direct investment option, you can enjoy both of these returns.

Let’s fast forward a couple of decades into the future.

Your hunch has played off and the area is now unrecognisable. Towering office buildings, a cosmopolitan population — the ugly duckling has now transformed into a beautiful swan!
Chances are, the value of your investment could have soared, maybe even doubled or more. Now, it might be time to sell and turn that paper value into real profit.

Gurgaon’s Meteoric Rise

In the last couple of decades, Gurgaon has grown immensely. It’s developed into a bustling IT and commercial hub with some of the most expensive real estate in India!

The evolution began in the early 2000s.

Many large companies started setting up offices. There was also extensive development of commercial and residential buildings, along with infrastructure improvements like the Delhi-Gurgaon Metro line.

The metamorphosis is now complete.

Today, Gurgaon has developed into a bustling city. Some areas have experienced a 100% increase in property value over a decade. The influx of companies led to increased employment and rapid urbanisation.

1. Diversification Benefits

   Real estate offers significant diversification benefits. Its performance is not directly tied to stock or bond markets, which can reduce overall portfolio volatility. For instance, during economic downturns, while stock markets may plummet, real estate often retains its value or even appreciates due to its tangible nature.

2. Inflation Hedge

   Real estate is historically known as a good hedge against inflation. Property values and rental income typically increase with inflation, which can protect the purchasing power of an investor’s capital. This characteristic makes it particularly attractive in times of rising prices.

3. Risks and Management Intensity

   Real estate investment also involves unique risks and challenges. It requires active management, including dealing with tenants, maintenance, and property improvements. Market risk, liquidity risk, and the impact of economic cycles on property values are also significant considerations.

When it comes to investing through public assets or private assets, both options generally involve commercial real estate. But there are some differences in how they work and perform.
Private real estate doesn’t fluctuate as much as its public counterpart. This can, of course, be attributed to the fact that it doesn’t get appraised that frequently. Public REITs, on the other hand, can be transacted in the market every day.

Apart from that, REITs also have a different financial structure. They tend to favour unsecured corporate debt and lower leverage. Private real estate funds, on the other hand, can have a higher loan-to-value ratio, maybe even more than 50%.