You can hardly browse or tune into 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 core to the needs of most advisors and their clients — including steady income, a track record for appreciation, inflation protection and a NAV and performance cycle that’s distinct from the ups and downs of the public markets.
Especially today, as poor returns and volatility roil the bond market, investors and their advisors are seeking out hard, asset-backed fixed-income replacements to fill an income-generating role in their asset allocations. Real estate is an asset class that can meet these needs. It’s not an alternative but a vital 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 alternative. Instead, I think of it as an asset as solid and ubiquitous as the ground under your feet.
Consider the history. Land has been a source of wealth since the earliest days of civilizations. Kings, nobility and popes grew their empires on the value of land — and until modern times, commoners couldn’t even own this valuable asset class.
Today nearly anyone can invest in real estate, and the asset class has grown to tremendous size. In 2020, the global real estate market had a value of more than $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 globally.
That’s not an alternative. That’s a linchpin of the global 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 comprises around $32 trillion, and agricultural land another $35 trillion. In the U.S. alone, the size of the residential mortgage market tops $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 of investment opportunities in real estate for advisors and their clients.
REITs were the first real estate investment vehicle specifically designed for mom-and-pop investors. Created in 1960 and significantly expanded in the Tax Reform Act of 1986, these funds enabled small-dollar investors to purchase shares in real estate portfolios — they were mutual funds for real estate investors.
The Jobs Act of 2011 created another, even more powerful mechanism for individual investment into real estate, making it possible to crowdfund investments for individual investors. Regulation D using Rule 506C allows the public offering of private securities to accredited investors. Savvy real estate managers have gained access to advisors by getting their funds on custodial platforms, and many offerings have successfully gone directly to individual investors, bypassing advisors.
The Jobs Act eventually enabled the creation of Regulation A+, which allows purchases by non-accredited investors, requires far less paperwork to onboard each investor — and can also be marketed directly to individual investors.
Many smart real estate managers are seeking space on custodial platforms to distribute to advisors as well as individuals, opening some extraordinary investment opportunities for ordinary people. With strong managers distributing monthly income, and eventually capital appreciation, these offerings are becoming hard for advisors, and the custodial platforms that serve them, to ignore.
With all of these opportunities in place, and the facility for nearly every investor to access them, real estate is no alternative. It’s a core investment for everyone’s investment portfolio.
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