It is difficult to surf or follow the financial news without real estate being presented as an “alternative” investment. And yes, real estate has unique investment characteristics that set it apart from asset classes like stocks and bonds. These characteristics are central to the needs of most advisors and their clients, including stable income, a track record of appreciation, inflation protection, and a net asset value and return cycle that is distinct from the ups and downs of public markets.
Especially today, when poor yields and volatility plague the bond market, investors and their advisors are looking for asset-backed fixed income replacements to fulfill an income-generating role in their asset allocations. Real estate is an asset class that can meet these needs. It is not an alternative but an essential piece of the asset allocation puzzle.
Moreover, real estate is too large and central to the global economy, and tied to world history, to be considered an alternative. Instead, I consider it as solid and ubiquitous an asset as the ground beneath your feet.
Consider the story. Land has been a source of wealth since the earliest days of civilizations. Kings, nobility and popes built their empires on the value of land – and until modern times, commoners couldn’t even own this valuable class of asset.
Today, almost anyone can invest in real estate, and the asset class has grown to enormous size. In 2020, the global real estate market was worth over $326 trillion. That’s more than the value of all the stocks and bonds in the world, and it’s more than 27 times the value of all the gold ever mined in the world.
It is not an alternative. It is a pivot of the world economy.
Residential real estate makes up the vast majority of this asset class, accounting for $258 trillion, or 79% of global real estate assets. Commercial real estate is about $32 trillion and farmland another $35 trillion. In the United States alone, the size of the residential mortgage market exceeds $11 trillion.
Institutional investors have long understood how central real estate is to a diversified portfolio. In 2022, they raised their average allocation in this asset class to 10.8%. But the real news may be the growth in real estate investment opportunities for advisors and their clients.
REITs were the first real estate investment vehicle specifically designed for family investors. Created in 1960 and greatly expanded in the 1986 Tax Reform Act, these funds allowed small investors to buy shares in real estate portfolios – these were mutual funds for real estate investors.
The Jobs Act of 2011 created another, even more powerful mechanism for individual investment in real estate, enabling crowdfunding of investments for individual investors. Regulation D using Rule 506C permits the public offering of private securities to accredited investors. Sophisticated property managers gained access to advisors by getting their funds from custody platforms, and many deals were pushed directly to individual investors, bypassing advisors.
The Jobs Act ultimately enabled the creation of Regulation A+, which allows purchases by non-accredited investors, requires significantly less paperwork to onboard each investor — and can also be marketed directly to individual investors.
Many smart property managers are looking for space on custodial platforms to distribute to advisors as well as individuals, opening up extraordinary investment opportunities for ordinary people. With strong managers handing out monthly income and possibly capital appreciation, these offerings become hard for advisors and the custodial platforms that serve them to ignore.
With all of these opportunities in place and the ability for almost any investor to access them, real estate is not an alternative. It is a basic investment for everyone’s investment portfolio.
Andrew Corn runs E5A Integrated Marketing, a data-driven, systematic investor acquisition agency, and is a former CIO and ETF designer.