The real estate fund market offers significant opportunities for those who understand the value of these funds and have the right investment perspective. In Singapore, there are a few REITs funds that equate to ten in total. Some people are hesitant when it comes to investments, but it remains a fact that these funds can guarantee the investor a constant flow of income, albeit at the price of poor liquidity.
The Benefits of a Real Estate Fund
The benefit of a real estate fund is derived from the revaluation of the properties contained in the fund and from the rents that the fund collects. The market can offer 2 to 4 percentage points higher than the inflation value, making it less of an equity investment. The real estate market, however, has a great meri – it is quite unrelated to the financial markets, given that the cycles of the real estate market are much longer than the cycles of the financial markets.
REITS and Financial Instruments
Financial instruments that are not correlated (such as shares with bonds) allow the construction of “efficient” portfolios. That is to say, financial portfolios have the best possible risk or return ratio, also taking into account the interaction between the various financial instruments. Therefore, real estate funds are very important, not so much for their “pure” value and return, but precisely because they are more detached from the financial securities markets.
Hence, a smart investment strategy is to include real estate funds in your portfolio in a percentage ranging from 5% to 15%. However, anyone who has invested in a closed-end real estate fund cannot request a refund of the share from the fund (since the manager cannot sell a building to repay the subscriber). Instead, they must find someone in the market to buy their share.
Being listed on a regulated market is an action required by the law and it guarantees greater liquidity to the capital. Participants can then regain possession of the capital invested at a value that has been increased by any capital gains or penalized by the market discount. Alternatively, the value may have a difference that exists at a given time between the market price and the asset value of the share.
The real value of a closed-end real estate fund is written in the report, which is signed by an appraiser who estimates the real market value of the real estate fund’s properties. However, being a market that is not very liquid, what matters in practice is the market price, which is determined by the law of supply and demand. There are situations where the market price never reaches the full value of the fund for all its real value.
The rules and regulations ensure thatfor the valuation of the real estate assets of mutual investment funds, the asset management companies make use of independent experts. The intervention of the experts is meant to guarantee the objectivity and independence of the real estate valuation, which is made particularly delicate due to the absence of objective reference parameters for determining their value.
From a cost-wise point of view, the costs borne by real estate funds are lower than those of traditional investment funds. However, do note that this similarity applies only to those who subscribe to the shares at the time of issue, because those who take over at a later date can only do so by buying them in the market. The costs paid are therefore equal to those that would be incurred if “common” shares were bought.