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What Are The Risks Of Real Assets As An Investment?
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All investments, including property funds and other real assets, carry risk.
Following years of poor performance by market-traded securities, investors are choosing real assets as an alternative. But all investments are subject to risk.
Battered by an economic downturn over several years, investors in the United Kingdom are, like their counterparts in the European Union and the United States, looking for investments that maximise asset growth. Traditional market-traded securities (stocks and bonds) in particular have underperformed, leading investors to look at alternative investments.
Alternative investments range from the opaque (short only funds, ultra short funds, absolute return funds, market neutral funds, hedge funds) to the transparent, such as real estate investment trusts (REITs), private equity and venture capital. A subset of alternative funds includes real assets, including land, developed real estate, rarities (art, antiques, stamps, fine wine, coins, antique cars), precious metals (gold, silver, platinum, palladium) commodities (energy sector fossil fuels, plus agricultural goods such as wheat and corn) and even renewable energy products (biofuel crops, solar panels and wind turbines).
This last category, real assets, holds great interest after the disappointments of exotic and complicated investments such as derivative assets. Art can be appreciated with the eyes, much like antiques. Fine wine can be held, traded or even consumed (a reckless investment act, but sometimes a celebratory gesture of something of even greater significance). Land can be traversed, formed, beautified and turned into human habitat. Precious metals are sometimes adornment, or held in bulk in safety vaults. We feel good when we invest in energy to power industry, perhaps even more so when it is from renewable and non-polluting sources. An antique car might be driven for very special occasions – carefully and responsibly.
But real assets such as these carry their own risks. While insurable, rarities such as art and antiques can be utterly eliminated by fire, natural disaster or theft. Commodities are subject to market forces that can, under some circumstances, cut value to a net loss.
Land investment and land development are also subject to external forces. But professional advisors control variables in strategic land investments with methods that include the following:
1. Choose land that will likely appreciate – Experienced land investors (many investors join small-group funds with professional advisors) search for property that is ripe for development (usually for housing) to accommodate the U.K.’s growing population. Such properties are typically slated to become part of a town plan. The investors – who at a minimum invest £10,000 – do not blithely wait for the planning process to play out but actively ensure their land investment progresses on a timely basis.
2. Infrastructure investment (where appropriate) – Some land investments benefit from the building of roads, the installation of utilities and water and sewage removal. This makes the property ready to build for construction firms.
3. Expertly time the land sale – All strategic land development follows a pre-set timeline. This is important to the investor, as he or she can know when to expect a distribution on the eventual sale profit.
Still, even well managed property funds investments come with unknown variables. Would-be investors who want to learn more about strategic land should consult with an independent and qualified personal financial advisor.
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