All about assets: real estate

Will Hodges examines what's hot – and what's not – about investing in property
Commercial awareness
Financial theory

What is real estate?

Real estate is the collective name given to properties of all descriptions. It can mean anything from a skyscraper to a patch of undeveloped land. Like any asset, it can be bought and sold and therefore represents an opportunity for investment.

Residential real estate refers to homes, ranging from ordinary family housing to apartment blocks and holiday resorts.

Commercial real estate refers to non-residential properties, including office blocks, shopping centres and government buildings.

What's all the fuss about?

Real estate has always been a popular choice for private investors, who are drawn to the potential to make substantial gains with relatively little risk. The boom period for property investment was the 1990s and early 2000s, when house prices rose dramatically and cheap financing was readily available to investors. On a corporate investor level, real estate has developed from a relatively niche area in which deals were conducted with minimal supervision to one involving stringent levels of regulation and much more transparency. This shift has opened up the real estate market to a whole host of investment firms who might previously have considered it too much of a risk.

Despite the impact of the sub-prime housing crash in the late 2000s, the real estate market has recovered to the extent that it's now regarded as a relatively "safe" investment option, aided in no small part by the erratic performance of global debt and equities (shares) markets in recent months. While domestic real estate assets remain the focus for most UK investors, firms are increasingly looking to faster growing markets in Europe, or further afield.

Who invests in real estate?

Real estate is reportedly the most popular "alternative" (that is, not debt or equities) type of investment, making up around 60 per cent of all alternative investment portfolios. Property now comprises the single largest area of investment for European pensions funds.

In recent years, the growing popularity of Real Estate Investment Trusts (REITs) has led to the further expansion of the market. REITs are financial securities that allow investors to purchase a partial stake in a property or in a mortgage contract. While REITs have been around as a financial product for several decades, the introduction of a fixed set of rules governing how they are traded only came into existence in the UK in 2007, and since then, their popularity has been booming with all kinds of investors.

What are the advantages of investing in real estate?

While individual homeowners may find the value of their property slashed dramatically in a recession, those with a spread of investments view real estate as a relatively low risk option - although the returns can be unspectacular. Whereas equity prices can virtually vanish overnight, homes and, to a lesser extent, commercial property, are tangible, steadfast assets whose value can't be easily flattened by an ill economic wind.

What's more, real estate offers the advantage of being one of only a few asset classes where investors can directly increase the value of their portfolio - by making improvements and repairs.

Finally, demand for real estate is consistent. In areas with high demand for housing such as London, house prices have risen consistently year on year, albeit on a less impressive scale than in the years leading up to the global economic downturn. Investment in real estate assets in emerging markets such as India and Brazil, meanwhile, have produced spectacular returns as income levels and the number of potential home buyers have sky-rocketed.

What are the disadvantages of investing in real estate?

Though considered safer than many other asset classes, real estate investment is not without its risks and, in this sense, perhaps still warrants its status as an alternative asset. Unlike shares or bonds, there is no index against which to measure the value of real estate assets, meaning that judging their performance is far more challenging.

Real estate assets' lack of liquidity is also an issue. Equities and debt can be easily traded on the market for cash if needed, but real estate assets (with the exception of REITs) are generally hard to sell.

Where could I fit in?

The global real estate market has never been bigger and offers up innumerable opportunities for graduates. Here are some potential positions for university leavers:

  • Real estate analyst with an investment firm or at an investment bank
  • Trainee surveyor with a real estate firm