(Note: This content is an 7-min read)
Property investment is one of the earliest asset classes around the world. Real estate and other physical assets are considered an asset class that offers protection against inflation. That is one of the reasons why it is sought after. The tangible nature of such assets also leads to them being considered as more of a “real” asset.
The property market around the world saw many setbacks in recent years including the 2008-09 financial crisis and also the 2019-20 COVID-19 pandemic. Despite all the economic struggles that people face, an article on Bloomberg suggested that prices of real estate remained high in many parts of the world. This is due to many aspects including the scarcity of houses that are up for sale, ultra-low interest rates and shifts in family spending. The stable prices of homes are one of the reasons why people tend to choose to invest in property as opposed to other asset classes.
In property investment itself, there are many different types of real estate that an investor can invest in. These are:
1. Residential Investment
Residential investments are investments into properties such as houses, apartments and other types of properties that come with Residential land titles. Same as other investments, not all residential investments will yield the same monetary results due to many factors – the main one being the location of the property. With higher monthly maintenance costs, this property investment could be a burden for investors if the rental collected is below the installment and maintenance amount.
2. Commercial Investment
The properties in this category are mainly office buildings, small office versatile office (SOVO), small office flexible office (SOFO), small office lease office (SOLO), small office smart office (SOSO) and so on. Shop lots and some retail fall under this category too. The key attractive upside to commercial investments is that costs such as utilities, management fees are typically borne by the tenant. Any defects within the property are also on the onus of the tenant to upkeep and fix. Another plus point is that most of the time the unit can be rented out unfurnished, which will save its owners a lot in terms of cost.
3. Retail Investment
Investments in retail properties are similar to those in commercial real estate, but they possess different mechanisms and prime locations. The retail properties are usually located in malls and other retail storefronts. In some cases, the landlord receives a percentage of profits from the tenant in addition to the base rent to keep the property in top-notch condition. This investment is a combination of property and business investments.
4. Industrial Investment
Industrial real estate investments are investments from industrial warehouses to firms as distribution centres over long term agreements and to storage units and other various special purposes that generate a unique level of income from rental or re-sale. Industrial real estate investments often have significant fee and service revenue streams to increase the return on investment for the owner. Industrial property investments are generally considered to be riskier as compared to residential and commercial property investments.
5. Real Estate Investment Trust (REITs)
Real estate investment trusts, or REITs, are particularly new in the property investment community with affordability and ease of entry in mind. It is one of the examples of asset fractionalisation, which is a concept of splitting up ownership of something so that many people can receive benefits from it in a proportion to the amount they own. Investing through REITs means you are buying shares of a corporation that owns real estate properties that distribute its income as dividends. It will even match your desired industry. For example, if you want to own hotels, you can invest in hotel REITs. The downside to this is that you do not own the said property, have little or no decision making power in how the whole piece of property is to be run or managed.
The Liquidity Risks in The Property Market
Despite all these choices, as an investor, the most important factor to consider when approaching real estate investment is liquidity. Liquidity refers to how quickly an asset can be bought or sold on the market for a price that reflects its current value. Investors should know each asset class comes with a unique level of liquidity risk. In particular, real estate assets as a whole are traditionally thought of as notoriously illiquid investments, while stocks are often known as the quintessential liquid investment.
Among these different types of property investments, REITs can be considered as the most liquid type of assets compared to the other four. Since it mostly resembles a stock/shares, the liquidity is almost a stock-market-like level. The liquidity of the four others would depend on the strategy:
Buy and hold
This is the first thing that people think when it comes to this asset class. This strategy involves buying a rental property, finding a tenant to rent it, and collecting rental income. Usually, this strategy bears the highest level of liquidity risk because you need to be patient and wait for the asset to appreciate before selling it off.
Fix-and-Flip
This involves buying an investment property or below market value, fixing it up, and then selling it to interested buyers for profit. While fix-and-flip real estate transactions tend to happen much sooner than with traditional rental properties, sometimes there can still be a liquidity crunch. For example, suppose potential buyers don’t like the work that has been done to the real estate property in question. In that case, it may be hard to offload and end up staying in your portfolio for a long time or eventually be sold at a loss.
Real estate wholesaling
This is also known as micro flipping which involves buying a property that is undervalued in the current market and quickly selling it to end buyers for a profit. With this strategy, investors often count on an established network of end buyers to help them sell quickly and a transactional funding lender who can provide them with short-term financing.
Crowdfunding
Crowdfunding in real estate is a financing method used by developers who lack the capital to finance their projects themselves. Typically, these developers will use a digital platform such as Ata Plus to pool money from individual investors to fund their projects. Eventually, if the project goes well, the investors will see dividends. This strategy is one of the more liquid investments in the asset class apart from REITs.
Looking at the current landscape of the property market in Malaysia, the high supply and the low prices following the COVID-19 pandemic indicates that now is a good time to invest in real estate, as stated by market experts. Nonetheless, it is fairly important to reflect on your financial situation and also think of a strategy before exploring this type of asset class. Ata Plus upcoming issuer will help and consult their client in regards to property investing. They can help educate their clients so that they achieve financial freedom. For more information, visit Ata Plus’s website at www.ata-plus.com. Stay tuned!
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