Thu | Dec 3, 2020

Non-traditional investing

Published:Monday | July 1, 2019 | 12:17 AM

The Jamaica Stock Exchange continues to perform at a high level and has, in recent years, garnered the international spotlight. This development has built local interest in earnings through investment. The current low interest rate environment has been boosting demand for real estate as an investment asset. The recent reductions in transfer tax and stamp duty are expected to boost overall performance in the sector, making it an even more attractive investment option.

Many Jamaican investors are capitalising on these lucrative opportunities of the real estate market by purchasing residential real estate as a more affordable alternative to commercial properties. A large number of persons, however, have not invested in real estate because they do not have large lump sums to spend on property, or are ­unable to access the loans to fund the purchase.

Today, there are options which require as little as $5,000 to invest for potential investors with budgetary constraints. These non-traditional options come through professionally managed real estate funds and real estate investment trusts (REITs). Through publicly accessible investment, funds are essentially pooled together, allowing persons to profit from the real estate market without having to purchase a whole property. Buying into REITs also reduces some of the risk inherent in real estate investment. Purchasing a single type of property, or properties in one location, opens up risks, including damage or environmental factors. REITs allow for greater diversification, with funds being spread across different geographies and types of real estate.

Though property prices may pose a challenge to enter the market traditionally, the investing environment has evolved, such that you can reap the same or more benefits, and potentially reduce risk by using the cheaper route of non-traditional investing.

Commercial Real Estate Set to Do Well

More seasoned investors with greater capital, and who have invested largely in residential properties, may be missing opportunities in the commercial segment. Furthermore, those who can afford to invest may yet be limited to one or two properties, which means their real estate portfolio is not diversified. As the economy improves, however, the business sector will continue to expand. This growth is expected to spur the demand for commercial real estate. Thus, tied to the anticipated buoyancy in the economy, the outlook for the commercial real estate market is positive.

Although there is also strong demand for commercial property because of their higher yields, the significantly larger sum needed to acquire them makes commercial real estate accessible only to those with deep pockets. Furthermore, new developments in the commercial segment have not been as vibrant when compared to the expansion in the residential market. There are a few business units and warehouses being developed in the Corporate Area, but they are not as easy to find. Despite the low supply, demand for commercial property is high, with institutional investors hoping for more pickup in commercial property development. Thus far, the greatest activity in the commercial property market has been the business process outsourcing sector.

This buoyant demand for property, both residential and commercial, has caused property values to rise. However, for the average person, the cost to invest in real estate, including the actual price of the property, the fees and taxes, may be substantial and out of their reach.

For potential investors who do not want to be left out of the market boom; whose resources for direct purchase are limited; or who want exposure to commercial real estate for diversification, non-traditional real estate investment strategies may be very useful.

The non-traditional route involves investing in a real estate fund or real estate investment trust. Real estate funds or REITs are mutual funds or companies that hold and manage a portfolio of properties on behalf of its investors. They trade on stock exchanges in a similar way to other stocks, therefore buying units or shares in a trust or fund makes you a part owner of the properties it owns, and with this ownership come ­multiple benefits.

Benefits of non-traditional real estate investing

n Professional fund managers – REITs or funds employ professionals with the expertise to manage all the fund’s investments, removing that burden from the investors, especially those without the know-how or time to do so.

n Attractive dividend yield – These funds and trusts own income-generating properties that earn rental income in a similar fashion to direct property investments. Once costs have been paid from the income received, fund managers pay out dividends to investors. These dividend payments have the potential to increase if the rental income earned from the funds’ properties rise.

n Liquidity – These non-traditional options are more liquid when compared to traditional real estate assets. This means that while the process to sell a property can be long and costly, shares in a fund or trust can be readily sold on the stock market to reap capital gains.

n Diversification – Investing in a real estate fund or REIT provides diversification benefits. These funds may hold residential or commercial properties, or a mix of both, across various countries, which increases the returns that could be gained, and reduces the risks associated with owning one property in a particular area or country.

n Lower initial investment cost – Investing in a fund is also cheaper. While you would need millions to purchase one commercial building, at $50 per share, you could use $25,000 to buy 500 shares in a real estate fund and become a part owner of multiple properties.

That said, there are disadvantages to investing in REITs or property funds. The fund managers typically charge fees ranging between 1.0%-2.5% or a flat fee levied against revenues generated by the fund/REIT. Some may even charge a performance fee for generating returns above a particular level. Investors should therefore search for funds with relatively low fees that offer attractive dividend yields.

While the emotional satisfaction of direct property ownership may not be provided by REITs, they are a great way to benefit from the real estate market while you work to secure the funds to directly purchase property.

All things considered, the positives of REITs do outweigh the negatives. With both current and future prospects for economic performance improving, now is a great time to invest in real estate. Choose the best option for you and venture into the real estate market today.

For the purpose of this article, real estate investing speaks to investing in real estate as a means of generating income and/or for price appreciation and not purchasing for the purpose of it being your primary place of residence.