We distinguish between:
- Real estate
- Cash
- Shares
- Bonds
- Commodities
The global asset allocation of all institutional investors is as following: 42% bonds, 36% shares, 2% cash, 11% commodities and 9% real estate.
Although the share of investments allocated to real estate is relatively low, it is growing from year to year.
Let’s dive into the risks associated with each asset class.
1. Real estate:
Risks associated:
- Capital loss risk: depreciation of the value of the property
- Liquidity risk: ability for the owner to sell out when money is needed, real estate assets are illiquid
- Rental risk: non-payment of the tenant, deterioration of the dwelling by the tenant, vacancy
2. Moneraty liquidities
Monetary liquidities, or cash includes all the money not invested. This is the least risky class.
Risks associated:
- Inflation: price increase and decrease of real value and purchasing power of cash flows.
- Currency risk: the variation in the exchange rate of foreign currencies has a direct impact on the accounts in another currency
- Monetary, political and geopolitical instability: possibility for the states to seize their people’s financial assets to emerge from an extreme situation
3. Shares
Shares are units of ownership interest in a financial asset that provide distribution of profits as dividends.
Risks:
- Market risk: risk of capital loss on resale if the share price has fallen between the time of purchase and resale
- Risk of bankruptcy: in the event of liquidation of the company, the shareholder could lose all of his investment
- Liquidity risk: impossibility of selling securities quickly, mainly concerns small companies, SMEs, and securities not listed on regulated markets.
- Currency risk: in addition to the evolution of the share price, the evolution of the currency rate when investing in a foreign currency
4. Bonds
Bonds are debt securities, generally issued by companies and governments which seek to borrow money on the different markets.
Risks:
- Default risk: the debtor (company or state) does not reimburse the investor
- Interest rate risk: an interest rate increase leads to a decrease of the market value of the bond
- Liquidity risk: impossibility of selling securities quickly
- Currency risk: in addition to the evolution of the share price, the evolution of the currency rate when investing in a foreign currency
5. Commodities
Commodity asset class is very large but mainly concerns precious metals, gas and electricity.
Risks:
- Market risk: fluctuations in the price of the commodities
- Holding risk: risks associated with the storage and preservation of these assets
Real estate assets present advantages over the other vehicles which are:
- Predictable cash-flows: continuous monthly income, more predictable than other vehicles
- Tax benefits: reduced tax rates for property owners who can deduct real estate expenses associated with the property
- Hedge against inflation: rents are increasable according to inflation
- Diversification of the portfolio from the stock market and its volatility
Why should you diversify the portfolio?
Spreading risks by investing in various products with no correlation between them and with different profitability and maturity dates enables the investor to better smooth out the risks associated with fluctuations in performance. An effective real estate portfolio must include a variety of regions, sectors and investment strategies. While most investors continue to have a strong preference for national investments in their real estate portfolios, the trend towards a more pronounced international orientation has been on the rise in recent years.
Real estate assets provide investors with income stability in the current environment unlike any other asset class. In addition, illiquid assets such as real estate tend to be much less volatile, which is comforting when the stock market is in trouble, are low correlated with other asset types and offer great opportunities of diversification for investors with a long investment horizon.
It is BrickVest’s vision to build a liquid marketplace for commercial real estate, allowing trading of both real estate equity and debt.
DCAuthorityLinks