How to Incorporate Real Estate into Your Investment Portfolio

How to incorporate real estate into your investment portfolio chart

On 24 August 2020, Minterest had our first webinar on “How to Incorporate Real Estate into Your Investment Portfolio”. Read on to find out what we have covered during the webinar as well as the answers to your questions raised during the Q&A session.

This webinar was presented by our guest speaker, Dr Chua Yang Liang, Head of Group Research and Strategy of ARA, who shared with us the current economic outlook in the real estate industry. As well as our Head of Investor Relations, Alvin Lim, who has also shared more about the different ways to incorporate real estate into your investment portfolio.

Watch the full webinar here.

 

The Real Estate Economic Outlook in APAC

Given the current global health crisis, global economies have clearly been affected and markets are likely to move sideways for awhile. However, real estate investments often take a longer term view and investors often look beyond short-term disruptions and look at the underlying demographic and socio-structure instead.

The APAC economy is to be larger than the rest of the world combined in 2020:

  • Compelling long-term fundamentals supported by growing middle class, rapid urbanization, rising incomes and consumption
  • Despite the pandemic, the economy is driven by innovation and tech, start-up companies and service sectors which have shown resilience
  • Rise of regionalism and the spoke-hub business model will continue to support Asia-Pacific region (APAC) as the business/HQ hub for large companies

APAC being the largest real estate market is offering attractive yields, transparency, diversification and liquidity supported by fundamentals. Despite the short term risks from COVID-19, the office sector remains a viable asset class, with 1.3 times faster growth in APAC office rents than the global average. A survey done early this year showed that 78% of institutional investors expect to allocate funds in APAC over the next two years (Source: ANREV, Investment Intentions Survey 2020).

 

How to incorporate Real Estate Investments

Diversification is the most important aspect of building any investment portfolio. It is necessary to reduce risk by allocating investments among various financial instruments, industries, and categories. Simply put, don’t put your eggs in one basket. Asset classes can be broadly classified into Equities, Fixed Income, Cash and Alternative investments.

Increasingly, Real Estate has been gaining popularity as an alternative asset class. This is because real estate can help to lower the volatility of your portfolio through diversification. Whether you invest in physical properties, REITs or other real estate products, they can potentially help to hedge against inflation, provide cash flow, tax breaks, equity building, or offer risk-adjusted returns.

To simplify, Real Estate Investments can be broken down into 4 broad categories:

 

1. Physical Properties

 

 

Physical properties are the most common real estate investments and usually also the biggest single investment for most of us. It can be the most rewarding or the most frustrating decision one has ever made. Properties purchased for investment purposes are usually rented out, the aim is to use the rental yield as a form of passive income, or to pay off the loan taken for the asset in some cases. There is also a high possibility of capital growth over the years and selling it for a higher price compared to your purchase price during a market boom.

However, investors also have to note that it requires a high quantum to start investing in a physical property, especially in Singapore where an investable property could easily cost more than a million. Knowing when to purchase a property is also crucial, getting the right timing can make or break the investment. For example, during the Lehman crisis, many investors are forced to sell properties at below cost as banks are calling for top ups due to the loans having bridged the LTV requirements. It is also important to take note of the varying costs (e.g. conservancy fees, utility bills, legal fees, stamp duties), as well as the interest rate environment if a loan is required

 

2. REITs and Mutual Funds

 

 

Real Estate Investment Trusts (REITs) are listed companies that own commercial real estate such as hotels, offices and many more. You can invest in these companies on the stock exchange and the funds are used to operate and run properties. While real estate mutual funds are funds that invest into the securities of real estate companies and are professionally managed by a fund manager.

REITs and mutual funds are a good way to start if you want a low entry point, and could go as low as a minimum investment of $1,000. It also provides you easy diversification into different geographical locations and sectors (offices, industrials) since a single investment could have exposure to hundreds of underlying assets. Both have a regular payout, ranging between 4 – 8% p.a. for REITs and 3 – 6% p.a. for mutual funds. Since they are publicly traded on a daily basis, it does not have a lock in period.

However, it is important to note that these are typically long term investments as it is advisable to hold them for at least 5 years and above. REITs and mutual funds also have an inverse relationship with the interest rate environment, and are prone to market volatility, resulting in possible loss of capitals during market down time. Despite the low entry points, there may also be additional costs such as commission, sales charges, trailer fees and management fees.

 

3. Real Estate Private Equity Funds

 

 

A real estate private equity fund is an asset class composed of pooled private and public investments in the property markets. Investing in this asset class involves the acquisition, financing, and ownership (either directly or indirectly) of property or properties via a pooled vehicle.

These private equity funds allow for equity participation which allows investors to earn returns from the rental income or capital gains when selling these properties. Depending on the mandate of the fund, interest can range from 6% to double digits. This also allows for exposure to non-traditional assets such as to student housing, hotels, self-storage, medical offices and undeveloped land.

Despite these advantages, these private equity funds are typically only accessible by accredited investors and have high minimum investment amounts of $200,000. They usually have a lock-in period of 3 to 5 years, or even up to 10 years. Plus, these are complicated structures where special purpose vehicles (SPVs) are used, with complicated legal structure and different layers of ownership, which also limits liquidity since it is not publicly traded and does not have a secondary market.

 

4. Real Estate Crowdfunding

 

 

Real estate crowdfunding pools investor’s funds for a real estate project or investments. Often, this is done by investing the funds into a private REIT. It could also be possible for these platforms to provide access to private real estate development projects.

With crowdfunding, investors are able to enjoy much lower quantums, some platforms could provide minimum investment amounts from $100. These investments typically have short tenors that range between 3 to 12 months. A typical structure for these investments are with a specific property and with recourse on the property itself. They also provide stable interest rates that are disclosed upfront, ranging between 4 – 6% p.a..

Investors do have to note that investing in crowdfunding real estate is non-liquid since it is non-tradable and investors have to hold their investment till the end of the tenor. Similar to private equity funds, there are also complicated structures involved where SPVs could be used. Investors also have to note the risks involved in crowdfunding structures, the investment may be affected if there are any complications with the platform. Investors also have to ensure that the platform does its due diligence before providing these investment opportunities.

 

Minterest Premium Property Investment Opportunities

Premium Property Investment (PPI) is a new product just launched on our platform this year, our PPI deals are in partnership with Straits Real Estate Private Limited (SRE) and ARA Asset Management, who are experienced real estate managers. Our PPI deals are highly popular with our investors and have been taken up within minutes of the launch. Here are the reasons why:

  • We provide exclusive access to real estate investments that are traditionally only available for institutional investors.
  • Our innovative product structuring makes it available in bite-sized and affordable quantums with investment amounts starting with a minimum of $2,000.
  • Our deals offer stable returns between 4 – 10% p.a. depending on tenor and risk profile.
  • Investing in real estate tends to be an illiquid asset class but through Minterest we are able to offer short term investments ranging between 3 – 12 months.

Real Estate investments requiring huge capital is a thing of the past. With Minterest, you are now able to co-invest in bite-sized amounts with institutional investors in our institutional-grade real estate deals. Our next Premium Property investment deal is launching in September 2020. This offers an investment opportunity to invest in 24 properties across 6 different countries and 3 different asset classes. Sign up on our platform to find out more. 

 

Our answers for the Q&A session:

  1. Which real estate product should I focus on/ start with? What if I am a risk averse investor?

For any typical investment, it is important to make the investment decision based on your risk and reward profile. Investors need to know your risk appetite and evaluate the returns on the investment opportunities against the known and unknown risks. We have a wide range of products which suit a variety of risk classes, with tenors and budgets which cater different types of risk profiles.

  1. Which sector should be the area of focus for real estate right now?

In the current market where the risk is elevated, real estate is a sector which is secular in trends, such as social-demographic trends and consumption. In this case, one of the emerging trends which we are seeing is in the tech sector, relating to e-commerce and data sectors. Likewise, digitalisation of the retail space has also driven online consumption, which in turn is driving industrial, logistics spaces and data centres. We have also noticed lifestyle homes becoming increasingly popular amongst the Asian population as well.

  1. How do you compare investing in REITs? I see REITs as more liquid and the returns seem comparable.

For REITs, as it is publicly traded and hence it is subjected to market volatility. The structure of our product, although is less liquid but it is not subjected to any price fluctuation.

  1. Are these investments secured?

With any investments, there comes risks. The investment opportunities distributed on Minterest platform will be relatively low risks with managed downsides as all projects are subjected to strict due diligence processes and independently conducted by our real estate partners. For a sense of how rigorous the deal selection is, for every 100 deals that are presented, less than 5% get shortlisted for evaluation and out of that, only 2-3 deals would have passed.

  1. What is the track record of Minterest in real estate investment?

Since May 2020, Minterest has already successfully launched 5 real estate deals and all of them were fully subscribed in less than a day. Out of which, two deals got snapped up in just 2 minutes. These gave us great confidence in the trust that we have from our investors and we will continue to create good products and provide exclusive access to investment opportunities in real estate that are traditionally not available for retail investors.

  1. As equity investors in the Co-investment, do we as investors have a say in the exit of the asset or other matters related to the asset?

As an equity investor, you do not have active involvement in the actual properties you are investing in.

  1. Are the investment options open to retail investors? I noticed that the total funding amount requested is typically small and sold out almost immediately, how does allocation work?

Our platform has various deals which are open for retail investors, our minimum investment amount is $2,000. The deals are only open and accessible to members who have signed up and pass their member’s verification. On the day of deal launch, members would receive an email in advance which provides you the details of the investment. If you would like to make an investment, our deal will launch on the platform at 5.55pm, and you will be able to log in to start investing. Allocation is on a first come first serve basis, but our real estate deals are generally larger, going up to $5 million, hence it should not be difficult to receive an allocation.

  1. How do I sign up and would I be in time to invest in the upcoming deal in September 2020? Will your KYC process take a long time?

Our KYC process is relatively fast and you will be able to complete and passed your member’s verification within 1-2 working days as long as all necessary information and documents are provided. There should be sufficient time for you to sign up, once you pass the KYC process, you should receive an email from us confirming your membership and you will be able to start investing in the deals on our platform.

  1. How much would be the total returns (Rental yield + Capital Appreciation) one can expect from this upcoming investment (Sep 2020)?

Under MAS regulations, we will only be able to provide further details on our deals and investments to our platform members. This means that you will have to sign up and complete your member’s verification on our platform to receive more details. Once you complete this process, you will be able to log in to the platform to view deals and will also receive emails with details on the upcoming deal launches.

 

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Shaun Tan

Loan Executive

With 6 years of financial planning experience, Shaun has helped many individual and corporate clients achieve their goals. 

Shaun is passionate about life and adventure, and is a licensed divemaster who enjoys bringing the joy of the underwater world to others.