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Real estate investment trusts (REITs) were created, offering an alternative option to liquid real estate investments. Real estate is regarded as a liquid asset class, but publicly traded property stocks, such as REITs and real estate operating companies (REOCs) allow investors an opportunity to access real estate without sacrificing the benefits of liquid equities.

REITs is a company that owns real estate-related that produces income from assets such as lands, buildings, and real estate securities. To provide a structure comparable to what mutual funds offer for stock investments, REITs were created.

“The continued global expansion of property stocks and REITs has led to the development of a more robust and sophisticated asset class. Moreover, potentially high dividend yields, inflation-hedging attributes, and modest correlations with traditional asset classes may serve to reinforce the potential benefits of including property stocks and REITs within a portfolio context,” financial intelligence company S&P Global Inc. (SPGI) said.

“[T]hey have also offered higher yields than other equities historically, may serve as an effective inflation hedge, and could help diversify a portfolio made up of other asset classes.  In addition, index-based products, such as REIT benchmarks and [exchange-traded funds] that track property, may provide a cost-effective means of accessing a diversified portfolio of REITs and property stocks,” it added.

An asset class is a group of financial products, which comes in different classes or investment assets. Asset classes are often categorized on their similar financial structure, and subjected to the same law and policies.

According to Corporate Finance Institute (CFI), a leading global provider in banking and financing, asset classes can be categorized into five categories: stocks or equities; bonds or other fixed-income investments; cash or cash equivalents; real estate; and forex, futures, and other future derivatives.

Moreover, location is an important factor when categorizing asset classes. There are investments in domestic securities, foreign investments, and other emerging markets. According to CFI, other assets like collectibles, investments in private equities, and digital currencies are other types of assets. These asset classes are grouped as “alternative investments,” and these types of investments are more into the illiquid part of investments.

Notably, aside from understanding REITs and asset classes, it is also important to keep in mind the role of real estate diversification. With this strategic approach, investing in various asset classes can lower the risk exposure of investors.

“You can hedge your investments in one asset class, reducing your risk exposure, by simultaneously holding investments in other asset classes. The practice of reducing investment portfolio risk by diversifying your investments across different asset classes is referred to as asset allocation,” CFI explained.

“The extent to which you choose to employ asset allocation as a means of diversification is going to be an individual decision that is guided by your personal investment goals and your risk tolerance. If you’re very risk-averse, then you may want to invest only in relatively safe asset classes. You may aim to diversify within an asset class. Stock investors commonly diversify by holding a selection of large-cap, mid-cap, and small-cap stocks. Alternately, they may seek diversification through investing in unrelated market sectors,” it added.

Sustainability-oriented tool

While REITs become an important investment tool, many investors are taking this opportunity to promote their sustainability agenda.

“REITs already control one of the keys to unlocking the energy transition, rooftops, moving us to a cleaner, greener, and more stable grid. That key also unlocks potential profits for REITs all while creating a mechanism to contribute to the communities in which their assets operate, in the form of greater energy security and utility cost savings,” according to non-profit energy organization Rocky Mountain Institute (RMI).

In the Philippines, the energy demand continues to rise. However, power outages remain a challenge, especially in the energy sector. Therefore, solar farms should be greatly increased in number to continuously meet and address the energy demand that the country needs.

Solar farming restores dry soil by using the soil as the surface for solar panel installation. With solar panels working, the soil regeneration creates new dirt and once the soil has been restored, it can be used to grow a variety of crops that communities can use.

While solar farms can be a great alternative to the country’s energy source, it also takes a lot of work as it requires a commitment to promoting biodiversity, soil regeneration, and improving livelihood opportunities and agriculture production. However, using solar energy or supporting companies that promote the use of renewable energy as an alternative source is more convenient as it can be used in homes and businesses, as well as help in improving financial planning, investing in energy-focused REITs can help in diversifying holdings and profiles. — Angela Kiara S. Brillantes

 

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