Diversification is a key part of investing as it reduces the volatility and risk of loss in an investment portfolio over the long run. Having a diversified investment portfolio generally yields higher risk-adjusted returns in the long run compared to a non-diversified portfolio, and is perhaps the most important component of reaching long-range financial goals whilst minimising risk.
Real Estate provides investors with the ideal opportunity to diversify their assets, due to the asset class’s low correlation with conventional equity investments. Furthermore, there are a myriad number of ways in which assets can be diversified within real estate itself, such as by sector, geography, or strategy.
Diversification through real estate can reduce risk by 60% - 94% across the United States and European markets.
One of the most widely used and recognised indices of listed real estate is the FTSE EPRA Nareit Global Real Estate Index which constitutes almost 500 real estate companies and with a combined free float value of over EUR 1.4 trillion. The FTSE EPRA Nareit Developed Europe Index covers 107 companies with a combined value of over EUR 200 billion.
The total value of listed real estate in across the global markets, covered by FTSE, EPRA, and Nareit is estimated to have a total value of close to EUR 3 trillion.
Pension fund real estate investments are typically passive investments made through real estate investment trusts (REITs) or private equity pools. Some pension funds run real estate development departments to participate directly in the acquisition, development, or management of properties.
Long-term investments are in commercial real estate, such as office buildings, industrial parks, apartments, or retail complexes. The goal is to create a portfolio of properties that combine equity appreciation with a rising stream of inflation-adjusted income to balance the ups and downs of the markets.
Real estate investing can be a very challenging experience but it can also be very rewarding. It takes some experience, not to mention a lot of patience, time, and money. After all, you can't just invest your money and expect to start profiting immediately.
The average annual returns in long-term real estate investing vary based on a number of factors—by the area of concentration in the sector.
According to the National Council of Real Estate Investment Fiduciaries (NCREIF), as of Q1 2021 the average 25-year return for private commercial real estate properties held for investment purposes slightly outperformed the S&P 500 Index, with average annualized returns of 10.3% and 9.6%, respectively. Residential and diversified real estate investments also averaged returns of 10.3%.
The real estate sector is divided into two main categories—residential and commercial real estate. Within either category, there are vast and varied opportunities for investors, such as raw land, individual homes, apartment buildings, and large commercial office buildings or shopping complexes. Investors can choose to invest directly in residential or commercial real estate or invest in real estate company stocks or bonds.