Property Of the real investments, property is the most significant investment for the retail investor (individual)
And it usually makes up a large percentage of the portfolio (when young - because the individual is obliged to have this asset). However, in the case of wholesale investors such as retirement funds, property makes up a small proportion of assets (in most countries around 3-5%).
There are many forms of property investment:
- Undeveloped land (zoned residential, industrial, office, etc.).
- Developed farm (fruit, cattle, game, etc).
- Residential (home).
- Multi-residential (block of flats).
- Retail (shopping centre, sectional title retail outlet).
- Office building.
- An office (sectional title).
- Industrial building.
- Leisure and tourism (hotel, resort, golf course, theme park).
Undeveloped land is purchased either to:
- Benefit from a price appreciation that is higher than the risk-free rate (i.e. the minimum guaranteed return) after taxes that may be levied on the property transaction (e.g. capital gains tax).
- Improve the property with the purpose of selling the improved property for a capital gain that is higher... (the statement above applies here also). An example is the building of a block of flats with the purpose of selling them under sectional title. (In fact often the developer will only start building once a certain number of flats have been sold - to lessen risk)
- Improve the property with the purpose of deriving a recurring rental income into the future. Examples are the building of a block of flats and the building of a shopping centre.
With the exception of a residential home, the rest of the forms of property investment are held with the objective of rental income (or income in the case of a farm) in the main. Capital gain is usually a secondary motive, unless the economic environment is one of high inflation. Then, capital gain becomes the primary objective of investment.
As we will see later, the valuation of income-generating property is related to interest rates, i.e. the income on interest bearing assets, the domain of the financial system's money and bond markets.
As we have seen, "commodities" is the term for real assets / investments such as precious metals, grain, base metals, etc. These assets produce no recurring income, and are invested in for capital gains only. There are many ways in which to categorize commodities, such as:
- Hard commodities (non-perishable products or non-consumables)
- Precious metals
- Non-precious metals
- Base metals
- Ferrous metals
- Soft commodities (perishable products or consumables)
- Agricultural products
- Products from livestock
- Fishing products
Generally speaking investment portfolios do not contain a large proportion of commodities. The reason, as noted, is that commodities do not produce an income34. Also, it is rare that commodity portfolios contain consumable products. Where investment portfolios contain commodities, the commodities are usually of the precious metal variety, particularly gold, platinum, silver and so on.
Precious metal investments take on many forms such as bullion, but the norm is coins, because of the convenience (compared with bullion). As noted, commodities do not yield a recurring return, only capital gains. Precious metals are also notably volatile at times; gold, for example, is a popular investment in time of unrest and uncertainty.
Often, investment in commodities takes the form of investment in investment vehicles, such as securities unit trusts (SUTs) and exchange traded funds (ETFs) (to be discussed later), mining shares and so on.
Other real investments
"Other real investments", as we have briefly seen, include investments in items such as:
- Art of masters (such as Rembrandt).
- Antique furniture.
- Rare stamps.
- Rare books.
- Rare coins.
Generally speaking, investments in these items, and in certain commodities (such as gold and diamonds), are not undertaken by the large investors such as retirement funds, but by high net worth individuals and reflect motivations such as:
- The desire for diversification of personal investments.
- Personal satisfaction (aesthetic value).
- Survival (as in times of war).
- Inflation hedging.
To this category one can add other investments that do not have an aesthetic value, such as "tank containers". These investments have currency hedging and tax advantages
Generally, investors expect capital gains from all real assets, and a return only on certain non-undeveloped properties in the form of regular rental income. Many individual investors regard their residential property as their sole investment in real assets, because it generally makes up a large proportion of their assets.