Real Estate Becoming Fourth "Asset Class" ?
Stocks, bonds and money market securities - the so-called “Big Three” personal investment options - may have to make room for real estate more and more often in the coming years. The Seattle Post-Intelligencer reports that a number of investment firms are making real estate an “asset class” in and of itself, which will likely lead to a dramatic rise in personal property investing.
Some advisers and money managers have already begun to give real estate official asset-class treatment. A press release from DAK Associates, a Conshohocken, Pa., executive search firm, declares that “With real estate investment trusts one of the hottest sectors of the stock market the past five years, the demand for investment industry professionals that understand the real estate arena has never been greater.”
Real estate has always been counted among individuals’ assets, but as investment material it is typically corporations or businesses that do the majority of the dealing. Distinguishing it as its own class will lead to the squeezing of real estate into all sorts of personal portfolios - no different than Treasury bills or a large-cap stocks. All sorts of people will be soon be buying, holding and selling without a knowledge of the markets or any particular reasons why.
All this attention might, at first, seem like a plus for real estate. What better status for a new category of investments than one which helps broaden demand to institutions and individual investors who aren’t in the market for a place to to live or to conduct business? Critics warn of the potential drawbacks, however.
- Acclaim of this sort in investing often turns out to be a dubious honor, as by the time such distinctions are made, the best chance for entering the market and making the most of a rising trend early has probably passed.
- Perhaps more importantly, the bestowing of “asset class” status may turn a new category of investments into a kind of financial football, to be kicked around markets with little regard for the consequences or even its real-world investment merits.
Proponents of the second argument point to bigger stocks, which have been stagnant since the late ’90s in the hands of investors prone to trading with little or no concern for a company’s long-term business prospects, and government bonds, once a failsafe investment vehicle until Wall Street traders became obsessed with them. Another potential problem is that like hedge funds and some other “alternative” forms of investing, real estate is not homogenous. In other words, every deal is different. In addition to standard commercial real estate and residential property, there exist home-building stocks, REITs (pooled real estate investments) that specialize in owning properties, REITs that specialize in property loans or leasing, et cetera.
Years before it became so popular that it was given “asset class,” status, real estate established itself as a conservative, efficient means of building and preserving wealth. Many investors have a substantial allocation of their wealth in real estate — but in the form of houses they live in, vacation in or rent to others. It is extremely doubtful that something would seriously threaten that status, not even the much-predicted bursting of the real estate bubble.
Critics warn that while owners have traditionally have held these assets long-term, that may change in today’s price-conscious market. Once any type of investment starts to trade on price a sense of underlying value, the commodity is open to heightened risk and volatility. Real estate investments will never be exempt from the forces that rule all free markets, though. If prices get too high, they will sooner or later fall, and over the long run, investing is smarter than not.
