Real estate investments, alongside other alternative investments, have become increasingly attractive to investors as they think about how to construct their portfolios in the wake of the market turmoil that defined 2022. When analysing a particular real estate investment opportunity, individual investors usually take into account the following criteria:

• The price for getting access (i.e., the minimum investment amount)

• The quality of the underlying asset(s)

• The financial returns and portfolio diversification benefits

• The environmental or social benefits

• The liquidity of the investment

The five criteria above, while not exhaustive, overwhelmingly shape investment decisions, but matching these needs to an investable product isn’t as simple as it sounds. The investable universe continues to grow, but there’s still a gap as investors look for products tailored to their needs.

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Putting faith in the markets

Two of the more traditional methods for investing in real estate include public REITs and open-ended property funds. These investments are expected to deliver a range of financial benefits, typically income-focused, while they also bring much-needed diversification through their exposure to a number of underlying real estate assets. Getting access is also quite straightforward and affordable - all one needs in order to invest in a public REIT is a brokerage account.

These investments come with their own challenges, however. Public REITs are, as the name suggests, publicly-listed and, consequently, tend to be more volatile than private market investments. In being marked-to-market daily, public REITs’ price movements are instant and real-time. They also exhibit higher correlation to other financial assets than their private peers. For an investor looking to build resilience in his/her portfolio, investing in public REITs isn’t quite the silver bullet.

On the other side of the aisle are open-ended real estate funds, where liquidity is frequently a cause for concern. Liquidity can evaporate into thin air during periods of macroeconomic uncertainty, when managers find themselves in the perilous position of having to shed assets in order to return investors’ capital. Recent economic volatility has left the open-ended fund market in a sorry state, with billions flowing out of the sector in the past few years.

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Returning to brick and mortar

Some individuals choose to go down the brick and mortar route on their real estate journey, physically purchasing property to personally manage and rent out in return for income. A buy-to-let strategy can deliver income as well as capital appreciation through growth in the market. For the year to October 2022, property prices across the UK rose by over 10%, meaning that the average house, valued at c. £300,000, would have, in theory, delivered its owner almost £30,000 in appreciated capital. 

The major downside of the buy-to-let strategy comes in the form of the work required to purchase the property: stamp duty, lining up a mortgage and all. The amount of work and capital required to purchase and manage a rental property is orders of magnitude more than investing in a platform or a fund. Being a landlord also has major implications when it comes to tax, as many regions have extra levies on new properties, and purchasing a home represents anything but a liquid investment!

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Investing in the digital age

The development of digital solutions has increased the accessibility of real estate investing. Investors can now get direct exposure to real estate for as little as £100 through crowdfunding platforms, and these investments can provide financial benefits in the form of income and capital appreciation. Some platforms offer a degree of liquidity, but for investors looking for exposure to institutional-quality, prime real estate, crowdfunding is unlikely to provide the solution. The bias of crowdfunding projects swings in the direction of residential real estate in secondary or tertiary markets. 

An alternative digital solution is fractional investing, which is gradually making real estate investing even more accessible to individuals with less capital to deploy due, in part, to developments in blockchain technology. An increasing number of real estate assets are moving on chain, providing individuals with more choice and the possibility of being able to select investments that align with their values, whether they are financial, social or environmental. Like many real estate investments, however, fractional investing opportunities are still illiquid. Buying a fraction of an asset should still be considered a long-term investment, but steps are being made in the right direction when it comes to removing friction from the trading of fractional investments.

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Filling the gap for retail investors

Ultimately, there is no ideal industry solution, and individuals have to make compromises when it comes to investing in real estate. Where one type of investment excels, another might disappoint. But investors shouldn’t give up yet; policymakers, investment managers and startups are working to expand the investable universe with products that fill the gap for retail investors. Satisfying an investor’s need for affordability, quality and liquidity, amongst other criteria, could be just around the corner.

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Nothing in this article constitutes financial advice or guidance. The content in this article is an opinion and is for general information purposes only. This article is not intended to be relied upon to make financial decisions. It is not intended to be financial advice. The value of your investment can go up or down so you may get back less than your initial investment. The article may contain links to third-party websites or resources. Hedgehog provides these links and resources only as a convenience and is not responsible for the content, products, or services on or available from those websites or in those resources, the links displayed on such websites or the privacy practices of such websites.‍