Direct or Indirect Investing: Real Estate Investment Types
Wissens | February 4, 2019
Direct investing means buying a stake in a specific property, which can be a single asset or a portfolio of assets.
A single real estate asset is defined as a single property excluding residential properties with fewer than 4 units.
A property portfolio is a group of property investments, which is owned by one individual or one company and that shares the same financial goals. The benefits of having a property portfolio over a single asset is that return expectations can be diversified; if one asset doesn’t hit its target, other investments might compensate. The overall expected returns of a portfolio aim for a balanced return from different properties over time.
Two risks are distinguished within an asset portfolio: specific risk and systematic risk. Specific risk is unique to each individual property and independent from one another. In a portfolio of several assets, this risk is diversified away amongst each property. For its part, systematic risk is unavoidable. It is the tendency for assets to move together and to be correlated. The main systematic risk is the market itself.
Direct investments have the advantage of being more attractive for institutional buyers, as they are usually of larger size. Investors have a greater control in decision making and can choose the asset according to criteria such as location, asset type and strategy with fully transparency of information. However, direct investments are usually less liquid. Investors must hold the asset over a period of years and cannot sell it in the meantime.
Indirect investing usually involves purchasing shares in a fund. We distinguish usual funds and blind pools. Fund investing means investing into a fund which then invests on behalf of many investors. The Fund’s managers find projects which meet pre-established parameters. For its part, blind pool investing refers to investing in a fund which doesn’t tell investors what type of business activity they want to pursue. Investors interested in this type of investment are usually the one who trust the sponsor and don’t want to be involved in the deal by deal selection.
The greatest advantage of indirect investing is that it allows investors to invest lower amounts than direct investing. Moreover, it is more liquid as it allows investors to easily buy and sell their shares and requires reduced management costs. However, in both, investors have no control and little knowledge about the investments.
Both direct and indirect investments are however driven by market trends and the strategy of the investment. The holding period of the asset for example, will depend more on the strategy of the investment (Core, Value add, Opportunistic) than on the type of investment (direct or indirect), even though indirect investments are more liquid.
Regarding global transparency of information, this will depend on the state. Germany has, for instance, more data restriction than the US and the UK; the information related to the investments can thus be impacted.
Investing through BrickVest’s Harvest family funds allows investors to have the flexibility of a fund with the consistency of direct investment types. Indeed, our funds are theme-based by strategy, asset class and location. Harvest funds allow investors to invest lower amounts than in traditional funds, while benefiting from the same terms as institutional players.