Post Modern Investment: Facts and Fallacies of Growing Wealth in a Multi-Asset World

Chapter 7

Real Estate

The New World

Real estate is perhaps the only asset class that evokes a visceral reaction in investors that at times transcends its monetary worth. There is something mystical here; something amorphous that reflects a magnified stability and sense of eternity. In ancient times, real estate was the defining symbol of wealth. The ownership of real property was the exclusive right of kings, and all others paid a toll for its use and enjoyment. In many ways, that theme is the undercurrent of today's trophy commercial properties, named office buildings, and homes. In the modern investment world, real estate investment exists in many forms. It is both public and private—both fixed income and equity—and both direct and indirect. Each has its own risk and return profile, and each has its own associated myths and misconceptions.

The types and forms of investment real estate are immense. Yet irrespective of form, there are a number of defining characteristics inherent in all such investments. First, investment real estate is relatively illiquid. As a result, it is difficult to market directly in its basic form. The cash flows or valuations must generally be in some structured security before being made available to investors. Second, real estate is subject to information asymmetries. By definition, investment real estate is not transportable. Thus, its risk and reward attributes are keenly influenced by local politics, sentiment, professional relationships, laws, regulations, ...