Alt Asset 2 - Private Real Estate
What Are Alternative Real Estate Investments?
Alternative investments are those that go beyond traditional options. In real estate, this includes mortgage funds, partnerships & syndication, REITs, crowdfunding platforms etc. Unlike buying property directly, these alternatives usually require you to invest through a sponsor. They are meant for those investors who are looking to diversify their portfolios beyond traditional stocks and bonds and may not have enough funds to buy property directly.
Sponsors can be large financial firms or smaller groups that manage these investments. They offer access to real estate opportunities that aren't available in the public market, which some investors find more appealing and potentially more profitable.
Types of Alternative Real Estate Investments
Real Estate Crowdfunding
Real estate crowdfunding platforms let people invest in real estate without needing a lot of money upfront. Instead of buying a property on their own, investors can join a platform like Fundrise and team up with others to share the costs. These platforms offer a range of projects, like mixed-use properties, so investors can pick options that match their goals, risk comfort, and preferred property types.
Growth of Real Estate Crowdfunding Market
The Asia Pacific region is leading the global real estate crowdfunding market. This growth is mainly due to the rise in commercial real estate activities driven by increased industrialization, which creates a higher demand for financing real estate projects. Other factors contributing to the market growth include the growing popularity of lending-based platforms and supportive government policies for crowdfunding.
In North America, the market is expanding because of the increasing construction of commercial properties and the popularity of crowdfunding platforms. Canada's real estate crowdfunding market is expected to grow significantly in the coming years.
In Europe, countries like the UK, Germany, France, Italy, and Spain are driving the real estate crowdfunding market. The UK had the largest market share in 2021. This growth is due to the rising interest in debt investments in real estate and the increasing interest from individual (non-institutional) investors in using crowdfunding platforms. This interest is supported by the high expected returns in the sector and a favorable regulatory environment.
Mortgage Funds
Mortgage funds offer another way to invest in real estate by pooling together mortgages that are lent to borrowers for property investment projects. This allows investors to earn returns from these loans without needing to buy a whole property themselves.
Growth of Mortgage Lending Market
Source: https://www.marketresearchfuture.com/reports/mortgage-lending-market-21829
The Mortgage Lending Market was valued at USD 12,515.2 billion in 2022 and is expected to grow to USD 27,181.6 billion by 2032, with a compound annual growth rate (CAGR) of 9.00% from 2024 to 2032. This growth is largely driven by supply and demand dynamics in the housing market, which play a key role in influencing mortgage lending trends.
Real Estate Investment Trusts
A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate and is usually traded on major stock exchanges. Investing in REITs allows individuals to buy shares in a portfolio of properties, such as apartment complexes and hotels, and earn income through dividends.
Growth of REITs
The table above depicts various aspects of the REITs market, including different investment types and risk profiles. It shows how investors can choose from a range of options, from low-risk core investments to higher-risk opportunistic investments, based on factors such as asset quality, location, and required improvements.
Partnerships and Syndication
Investors looking for alternative ways to invest in real estate might consider joining a partnership or syndication, where multiple investors come together to pool their resources and pursue a shared investment goal. Each partner contributes something valuable—such as expertise, funding, property opportunities, or time and effort. This approach allows investors to access a wider range of properties than they could manage on their own.
Benefits of Alternative Real Estate Investment Options
There isn't a one-size-fits-all approach for real estate investors, but investing in alternative real estate options, or "real estate alts," can offer several advantages:
Potential Passive Income
Similar to stocks and bonds, real estate alternatives can provide passive income. Many of these investments generate a regular cash flow, giving investors a potentially steady stream of income. For example, According to WallStreet Prep, REITs have generated 10% in annualized returns over the long run (including the last 10 years).
Professional Management
These investments are typically managed by professionals, reducing the need for investors to handle the details themselves. For example, Fundrise or RealtyMogul manage investment projects for investors. These platforms handle property acquisition, management, and maintenance, allowing investors to benefit from professional expertise without being directly involved.
Diversification
Real estate alternatives often have lower minimum investment requirements than buying properties directly, allowing for greater diversification in an investor's portfolio. This can help spread risk, especially in volatile markets. REITs allow you to invest in a diverse portfolio of real estate assets like healthcare, residential, retail, office spaces etc.
Portfolio Hedging
Unlike traditional stocks and bonds, most alternative real estate investments are not directly tied to the ups and downs of the stock market, which can help reduce portfolio volatility during economic uncertainty. Investing in a real estate investment trust (REIT) like Blackstone's BREIT can provide exposure to real estate without being directly tied to stock market fluctuations.
Inflation Hedging
Investing in alternative real estate can also offer a hedge against inflation, as property values tend to appreciate over time and dividends can increase with inflation. Since 1963, inflation has increased by 896%, but housing prices have surged by over 2,350%. Meanwhile, rent has risen by 892%, keeping up with inflation.
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