Investing in Listed Real Estate

Overview

In layman’s terms, the investment concept for real estate is relatively simple. Investors buy a property and collect a rent for it. They may also gain some capital appreciation and leverage the property to achieve a higher return on equity.

While simple in concept, the practical realization may not be always so straightforward, as anyone who has tried renting out a property, even something basic, such as a spare bedroom or a vacation property, would vouch for. The Global Financial Crisis (GFC) may also put in doubt the phrase “as safe as houses”.

Direct property investors face all the challenges of selecting a location, due diligence, legal documents, operational costs, taxation and unexpected structural issues or expenditures.

However, investors can circumvent most of these issues by hiring professionals, lawyers, surveyors, market analysts etc, through unlisted funds or listed real estate companies. In this paper, we seek to inform investors of the practical aspects of investing in listed real estate.

Academic research suggests that despite equity-like short term performance of listed real estate, the long-term returns of listed and unlisted real estate are similar. This finding has an important corollary in that equity investors can use listed real estate to diversify their portfolio holdings.

Historically high dividend yield is another attraction of investing in real estate.

Despite their similar common features, there is a wide dispersion in real estate returns depending on its geography and sector. The dispersion of returns offers opportunities for investors to create portfolios of listed real estate that reflect their specific investment beliefs.