This is the first of two chapters on real estate. This chapter provides a brief overview of real estate, followed by a detailed discussion of fixed-income investments backed by real estate. It also discusses liquid alternatives that provide exposure to real estate.
Real estate has been a very large and important portion of wealth for thousands of years. Even as recently as a century ago, real estate dominated institutional portfolios and was referred to as property. Private real estate has transitioned from dominating traditional institutional-quality investments to being considered by many as an alternative investment. This section provides an overview of real estate investment.
There are five common attributes of real estate that can encourage its inclusion in an investment portfolio:
These potential advantages, the first three of which are related to portfolio risk, do not necessarily come without costs. In particular, to the extent that markets are competitive and efficient, market prices of real estate will tend to adjust, such that any risk-reducing advantages will be offset by lower expected returns. However, some of the ...