Chapter 20 Investments In Real Assets Fundamentals

Transcript:Chapter 20 Investments In Real Assets Fundamentals:
Chapter 20 Investments In Real Assets Fundamentals of Investments FIN-330 Investments in Real Assets Learning Objectives Understand the advantages and disadvantages of real assets. Explain the portfolio significance of the correlations between real estate and other assets. Explain the characteristics of investing in real estate. Discuss the various forms of financing for real estate investments. Explain the traditional appeal of precious metals as a form of investments. Understand the factors that influence the value of collectibles. 20-3 Real Assets Real assets are tangible assets that may be: Seen Felt Held Collected Real assets during inflationary environments have at times outperformed financial assets. Examples: Real Estate, Gold & Silver, Diamonds, coins, stamps, antiques, art Wealth Indices of Investments in Equity REITs and Basic Series Index (Year-End 1971= $1) Returns by Asset Class Small Company Stocks Equity REITs Large Company Stocks Long Term Governments Treasury Bills 20-4 Advantages and Disadvantages of Real Assets Advantages Outperform real assets during inflationary periods Many believe real assets are good hedges against inflation* Helps to diversify your investment portfolio Relatively uncorrelated with financial assets Disadvantages Markets tend to be illiquid, charge larger commissions Do not produce current income (except real estate) Require insurance and in some cases specialized storage Real Estate as an Investment More that 60% of U.S. households own real estate as a home or investment Brokerage and investment firms are very active Creating and selling Mortgage-Backed Securities (MBS) Real Estate Investment Trusts (REITs) dominate Real Estate takes many forms Single & Multi-family housing Condominiums and time shares Commercial real estate: malls, industrial parks, buildings, hotels and motels 20-7 Real Estate as an Investment Investments may include: Homes Duplexes Apartments Offices Industrial buildings Shopping centers Hotels and motels Undeveloped land Real Estate as an Investment The Tax Reform Act of 1986 Substantially increased wait time to take full advantage of real estate tax deductions Severely restricted writing-off of paper real estate losses by passive investors against other forms of income Result: R.E. less attractive to investors and speculators Other Issues Various tax reforms blamed for declining economic conditions in late 1980’s and throughout the 1990’s. Lower than normal rates and loose lending standards led to over-supply and speculation Real Estate as an Investment Other Considerations Historically, only small cap stocks have out performed real estate on a risk-adjusted basis Real estate also provides steady cash flow Population growth rates drive demand, which in turn