Are real estate funds a good investment?
6 June 2019
In Italy, it has been possible to invest in real estate funds, which have a reputation for preserving their value over time, since 1998. Funds of this type, such as the Tendercapital Real Estate Fund, are a valid alternative to more traditional investments, especially in an environment in which interest rates have fallen steadily.
But how do they work in practice? What are their key features? And to get to the point, can investing in real estate funds be a good choice?
(To find out more about Tendercapital funds that invest in real estate, such as Tendercapital Real Estate Fund, click here).
Key features of real estate funds
Real estate investment funds must invest at least two-thirds of their portfolio in real estate assets, real interests in immovable assets and shares in real estate companies. They are closed-end investment funds that exist for a fixed period pre-defined by the fund manager, with redemptions only possible at maturity. Only in 2003, it became legally possible to issue new shares after the offer phase and redeem investments before maturity, with the aim of increasing fund liquidity.
There are different types of real estate funds, which differ according to:
- The type of investor they are intended for (retail or qualified investors)
- The asset purchase conditions (with or without a contribution)
- The dividend distribution policy (income or accumulation)
The term of a real estate fund may be from 10 to 30 years.
How real estate funds work
Once the portfolio of a real estate fund has reached a pre-defined amount (when the offer phase ends), the fund manager selects the properties for investment based on the fund’s investment strategy. Residential or commercial property, including offices, may be chosen. Other real estate funds focus on areas ripe for development or buildings that require refurbishment.
As is the case with other types of investment fund, investors are paid a monthly return, and at the end of the fund term, the initial amount they invested is repaid.
However, it has to be said that closed-end real estate funds cost less than open-end funds which invest in financial instruments. This is because:
- They are less liquid, since the unit value fluctuates significantly over time
- Closed-end real estate funds do not have a short maturity and the term may be extended by a further three years if there are problems selling the assets
- The returns paid are generally high, but the capital invested may be locked up over a long period.
In short, is the real estate market a good investment?
The real estate market has a major plus point: real estate market cycles are much longer than the financial market equivalents. As a result, “efficient” portfolios can be constructed with the best possible risk/reward ratio, even taking into account the interaction between the various financial instruments.
To conclude, the real estate market offers considerable opportunities to investors who understand the value of these funds, have the right investment horizon and choose professional and expert managers in this sector, capable of enhancing the value of their investments.