When you think about it, real estate underpins the entire economy in one way or another. Whether it’s your home, office, a distribution warehouse, data centre, university, or cell phone tower – the list goes on – almost every business in the world relies on some form of building or infrastructure. 
This makes real estate an incredibly interesting asset class. Since it transcends every sector and every geography, there will almost certainly be winners and losers at any given point in time. While retail and offices may be experiencing a dramatic downturn in the wake of Covid-19, online shopping, and the accelerated adoption of platforms such as Microsoft Teams and Zoom, has meant data centres and distribution warehouses are in high demand. So, to tar the whole of the real estate sector with the same brush would be missing an opportunity. Investors just need to think about how they can maximise and minimise their exposure in the right place, at the right time.
The ups and downs of investing in direct real estate
One of the biggest attractions of investing in the real estate sector is that it offers investors the potential for capital growth, as well as a trusted source of income in the form of rent. But that upside brings with it a lack of liquidity, and this is never more apparent than amid a global economic crisis. Anyone invested directly in property, or a direct property fund, may well have found their money trapped and falling in value. The value of property, after all, depends on the cash flows produced and how much someone is willing to pay for it – if, indeed, anyone is willing to buy it at all.
The rise in listed real estate funds
There is an alternative, though. There are companies listed on the stock exchange that specialise in owning, managing, and often developing property in a particular sector. The value of these companies fluctuates to reflect the market sentiment of the value of the underlying properties. Of course, shares in these companies will experience volatility like other equities, but there are several advantages to accessing the real estate sector in this way:
Liquidity
Listed property companies enjoy greater liquidity than direct property funds, since you are buying a share of the company, rather than a share in the underlying properties. Shares in these companies trade on the secondary markets of large public exchanges, such as the London Stock Exchange. That does mean investors might experience volatility in the short term, but for many this is an acceptable price to pay for daily liquidity.
Diversification
Listed property funds enable investment across different business sectors and geographies. If one sector or country is experiencing a downturn, investors can easily change focus, or take advantage of that downturn if they foresee a future recovery, or easily sell holdings deemed to be excessively priced.
Companies enjoy high barriers to entry
The value of these companies depends on more than just the buildings they own. Management are experts in their sector, with years of knowledge and experience – as well as strong relationships with potential tenants – that is difficult to replicate. They understand where they can add value to their portfolios, and when the right time to sell and maximise that value is.
Rental income provides regular income
Ultimately, the value of the company will depend on the rental income it generates, which it can then pass on to shareholders in the form of a dividend. Investors care deeply about the security of this cash flow, and whether it has the capacity to rise with inflation. With bond yields so low, this offers a good alternative for clients seeking income generation, as it is underpinned by lease contracts.
Gives investors access to niche sectors
These companies give investors access to property sectors that may not be accessible through a private, direct fund. Such niche sectors include data centres, lab space, healthcare facilities, manufactured housing, and cell phone towers.
Corporate governance
Listed property companies are subject to strict standards of corporate governance, financial reporting and information disclosure, as required by public exchange listing rules. Investors benefit from these securities regulations and from having a board overseeing the management on their behalf.
Don’t miss out on the real estate opportunity
While times might be tough for some parts of the real estate sector, there are still some excellent opportunities out there. Investing in a global real estate fund gives your clients access to these opportunities, with the objective of achieving income and capital growth throughout the full economic cycle. If your client is willing to accept some volatility in exchange for liquidity, then this is an alternative investment worth considering.
Theodore Freysen is senior analyst at Catalyst Fund Managers. The views expressed above are his own and should not be taken as investment advice.