Reasons to invest
A real estate fund might includes residential or commercial properties such as offices or industrial assets and aims to provide:
- an income from rent on the properties
- capital appreciation from rising markets or improvements to properties
- at least partial protection against inflation through rents, which are traditionally indexed against the Consumer Price Index (“CPI”) meaning as it rises, so do they
- an alternative to traditional fixed income such as bonds
- diversification benefits (they have a low correlation to equities and bonds)
Lastly, they provide diversified exposure to the world’s largest asset class.
How does inflation affect income from real estate?
Real estate is one of the few asset classes investors consider a good inflation hedge. The rental income generated by a real estate asset varies due to a number of factors, for example supply and demand or improvements made to the property. However, crucially in times of rising inflation, rents are generally tied to the Consumer Price Index (CPI) and rise with it. Over the long term, this mitigates the impact of inflation on returns. For example, if CPI increases by 3%, a fully CPI-indexed yearly rent of 100 would increase to 103. Assuming that all else remains equal, then the impact is demonstrated as follows:
[For illustrative purposes only]
This objective is based on the hypothetical gross returns achieved by a generic value-add real estate investment strategy. This target return does not in any way constitute a promise of future returns and is for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. All forms of investment involve risk. The value of investments and the income derived from them is not guaranteed and it can fall as well as rise and you may not get back the original amount invested. Performance figures are quoted gross of management fees and recurring costs.
How correlated is real estate to other asset types?
As you can see from the chart below, real estate tends to have a low correlation to other major asset types such as equities and bonds.
Source: Pictet Asset Management, as at 30.06.2022; Real Estate: NCREIF Property Index; Global Equity: MSCI World; EM Equities: MSCI EM; Govt Bonds: FTSE WGBI; Corp Bonds: Barclays Glb Agg Corp TR; REITS: FTSE NAREIT All Equity REITS TR. REITS = Real Estate Investment Trusts. Please note that past performance is no guarantee of future performance.
Explainer – different investing approaches
We offer two investment approaches. Each strategy has a different risk/return profile and strengths and weaknesses in different economic environments.
Core Plus aims to generate an immediate stable income from quality tenants. The assets are managed over long periods of time and generally only require small enhancements, refurbishment or development to increase their net operating income.
Value-add invests in properties that require management and/or structural improvements, may exhibit operational challenges or suffer from capital constraints. The purpose is to "buy low and sell high" following a repositioning or redevelopment.
A word on... liquidity
Real estate funds invest in property, which can take time to sell. The investment managers also need time to develop properties to create the value and returns investors require. This can lead to a mismatch between investors (who tend to want shorter-term liquidity) and the longer-term nature of the asset class. For this reason we carefully manage the liquidity of our portfolios. We utilise lock-up periods on our funds and use special investment vehicles like the well-regulated ELTIF (European Long-Term Investment Fund), which has been specifically designed to protect investors who put money into companies and projects which need longer-term capital.