Why 2018 is the year to diversify your real estate investment portfolio

By Alex Bellingham

/ Bloomberg |

January 29, 2018 8:45 AM SGT

At QIP, a Singapore-based, private-equity, real estate firm, we are firm believers that property should be part of every investor’s portfolio.

However, each individual sector of property has an upside and a downside, and for those who are looking to invest in markets such as the UK, 2018 is a good time to see which non-traditional options are available that might better suit the economic forecasts and investor sentiment for the years ahead.

Real estate is featured in only 20% of family office portfolios in Asia-Pacific and yet it has proven to be a reliable asset class, particularly for those seeking longer-term returns.

A student walks through the quadrangle of King's College, Cambridge. Photographer: Graham Barclay/Bloomberg News

The number of international students is high, and they expect modern, well-equipped and well-managed rooms throughout their university studies (Photographer: Graham Barclay/Bloomberg News)

Real estate has consistently provided positive returns with low volatility for investors. So, why haven’t more investors entered the property market?

Many individuals place their trust in bricks and mortar — investing in an asset that can be seen and touched. However, the implications of becoming a landlord (particularly a residential property landlord) can be off-putting for many high-net-worth individuals and family offices in particular.

The majority of Singaporean real-estate investors have full-time careers away from property. As an asset class, property is considered “high maintenance”, as it requires considerable time, energy and further capital to be a well-managed, long-term investment.

Arranging furnishings, finding tenants, checking references, managing deposits and keeping the property maintained are important yet time-consuming aspects of becoming a real estate landlord.

In addition, landlords need to keep up to date with the various laws affecting overseas property investors, not to mention filing annual tax returns and adhering to regulatory matters.

If you are an accredited investor, you may want to consider the most efficient and profitable way to benefit from real estate without the need to be as hands-on.

Real estate investment trusts are often invested in for this reason, but they are subject to the risks inherent in equity markets, and the tradeable price is often reflective of investor sentiment and not necessarily the underlying asset value. However, REITS are an easy-in and easy-out option.

Areas of real estate investment that are becoming increasingly popular for professional investors include student accommodation, retirement homes and healthcare facilities, which tend to sustain growth throughout economic cycles, owing to the demand for these types of residence.

For example, in the UK, there is currently a critical undersupply of property for university students, and the pipeline of new developments is not sufficient to meet demand.

The number of international students is high, and they expect modern, well-equipped and well-managed rooms throughout their university studies. However, the vast majority of available accommodation is converted residential housing that is subsequently registered as HMOs, or houses in multiple occupation. These tend to be located out of town and are of poor quality, owing to minimal management and upkeep. Meanwhile, the demand for city-centre accommodation with good amenities is rising rapidly.

In terms of investment risks, with Brexit on the horizon, the number of EU students in many of the country’s universities is relatively minimal; so, even if there was a notable decline in EU student applications, this would have a minimal effect on the demand from overseas students as a whole, which is far outweighed by countries outside of Europe such as China.

There is significant value in diversifying your investment base this year, both into real estate as an asset class and among the various real estate sectors that are available, such as student accommodation.

The global economy has finally recovered from the financial crisis of nearly a decade ago and central banks are tentatively starting to normalise policy. The economic cycle is relatively mature, but the warning signs of the next recession are still largely absent, especially with a short-term boost to come from US tax cuts.

As ever, we can find risks — geopolitics, Brexit, trade friction, the Chinese credit bubble — but they do not seem unusually intense. However, valuations of financial assets are stretched; this is the main challenge in constructing an investment portfolio and why diversification is key.

Alex Bellingham is head of fund formation and capital-raising at Q Investment Partners, a real estate, private-equity investment firm.

This article, written by Alex Bellingham, appeared in EdgeProp Pullout, Issue 815 (Jan 29, 2018).

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