From hedging to value impact, these are the reasons why investors choose real estate09 Jul 2018
A qualified chartered surveyor with almost 20 years’ experience in the industry, Ocorian Client Director for Real Estate Nick Terry looks at the reasons why some choose to invest in real estate.
Property is a very relationship-driven investment, and you need to ensure the people looking after those relationships really know what they’re doing. Our team works with investment portfolios ranging from around £20-30 million for single assets, through to portfolios of about £1.5 billion, all in commercial real estate, and have seen it all when it comes to the ups and downs. Here’s a few of the reasons why we’ve seen people choose real estate as their investment - with the caveat that there is always risk.
Long income streams and generally stable returns
Investing in real estate is rarely a quick-win solution; those who decide to invest are usually in it for a number of years and are typically looking for a long-term income stream. This is why stabilised real estate is of particular interest to institutional investors who have known liabilities they need to match on a periodic basis over a long timeframe - if you buy real estate now, and provided you have tenants who don’t run into difficulties, you know you have a reliable income stream for five, 10, even 20 years.
Rent reviews act as a hedge against inflation
Given this is such a long-term investment, there could be concern over the impact of inflation eroding your real-term rental income, especially given many tenants are long-term as well. Rent reviews are typical every five years or so for this very reason - they adjust the rent, reflecting market forces and/or inflation, and typically are drafted to be 'upwards only' in their nature. This helps to ensure that, even if the market runs away from you, you’re not blindly losing income. It’s a hedge against inflation; your real-term income is not being eroded.
It’s possible to significantly affect value
Not only do you have the rental income stream coming in, you can influence the capital value of an asset at any time. For example, if you invest £15 million in real estate, you could make further investments on refurbishment and significantly enhance the asset’s value; the same investment invested into FTSE shares could go up or down but largely at the whim of the market, and with minimal control from the investor. Similarly, your real estate investment will bring in regular income through rent; with shares, you may get a dividend, or not, depending on the performance of a company you can’t influence. Additionally, the investment is a lot more tangible with real estate - not least because you can visit it in the real world to check in.
But it’s not without risk…
The flipside, of course, is you don’t get any rewards without taking a level of risk. Real estate is not a market you dabble in; you do need to really understand what you’re doing. An investor needs to be well-advised and have a team around them that includes a good law firm and a good team of surveyors - that team may comprise investment surveyors to help find the asset; asset management surveyors to help manage the investment and the relationships with tenants; property management surveyors to look after the building; quantity surveyors to deal with specific elements of work, such as cost controls and project management. And, of course, that team must be paid from the investment returns.
And if you are using a corporate structure to hold an asset, it’s equally important to have a good firm of administrators who are highly experienced in real estate - this can help the whole investment cycle run more smoothly (and therefore more cost-efficiently), helping to mitigate risks from scrutiny over directorships and transactions and ultimately, contributing to better investment returns.