Investors who have spent years focused on a specific area of investment, such as property, commodities or the stock market, may feel like their experience gives them an edge in that sector.
However, no one can be certain of the impact that global events, politics, and policy will have on the world’s economy. This past year, the world faced many challenges that had a direct impact on the health of the global markets, including political uncertainty following the U.S. elections, the U.K.’s decision to Brexit and the global refugee crisis.
As the world continuously changes, it’s important for advisors to help their clients recognize the faults that could lie in their investment portfolios if they’re too focused in one area.
For instance, direct property investment can be tricky. Many property investors look at their returns incorrectly. They do not pay attention to the management costs and outgoings that are incurred in their portfolios, whether broker costs, research costs or, the case for most of our investors—direct property investment or development. Even the property developers we’ve worked with, often do not account for the impact that their incomes or costs of living during the development period had on their returns.
So, should investors consider real estate during fluctuating economic landscapes? The answer is yes. However, investors should look to alternative real estate investments, such as alternative real estate funds or REITs. These products offer the security of tangible assets in the form of bricks and mortar whilst having the added benefit of spreading that security over multiple properties that your capital alone would not allow.
The main reason many investors use alternative real estate investment products is that they act as a buffer to the risk of stocks and bonds in an investment portfolio—and we believe, can provide the prop up an investor requires to make their portfolio more profitable.
Diversified real estate investments can come with fixed returns that help better manage a portfolio. They often come with specific terms that do the same. The returns are usually at a higher rate than most other investments in a person’s portfolio and this helps the client to achieve their goals quicker.
In addition to the above, alternative investments offers no self-management requirement. This means that time may be spent elsewhere. Every investor must understand that time is money and if you must work 70 hours a week developing a property to make the same return on your investment as you would make in an alternative investment package, then the two investments are not comparable.
Developers in this position should look to use their capital more wisely and give themselves a wage during the development period. One way to do this would be to harness borrowing to its full capacity and invest the spare cash in alternative products that offer fixed returns. Remember, if you borrow at 4 percent for a development, but use the capital you have remaining (because you used the lending instead of your own hard earned cash) to make 10 percent plus, then you are making an additional 6 percent plus without making a change to your work load.
I’ll say it again, when it comes to investing in real estate, diversification is key. Real estate investments can complement your Return on Investment (ROI) and, most importantly, diversification across all sectors can spread your risk to protect you against global economic issues beyond your control.
Simon Calton is Co-Founder and Chief Executive Officer at Carlton James Group, an investment firm that specializes in hospitality, property and technology.