Nowadays, international investors are setting their sights on Asia, where there’s so much potential for growth. Many investors have also dabbled with Thailand real estate and a host of property development projects in the ASEAN region. But why invest in real estate and what advantages can it bring?
Real estate investment involves the purchase of a property with the end goal of generating revenue from it in the future. This type of investment offers a number of benefits such as higher returns, stable income streams, portfolio expansion and diversification and inflation hedging to name a few.
Here are some reasons why investing in Thailand property (and real estate in general) is worth your while:
One advantage of investing in real estate investment is that your income accrues over time and on a long term basis. From 1977 to 2007, a period of 30 years, approximately 80 per cent of total real estate return in the United States came from income flows. This diluted volatility as a result. Investments that are dependent on income returns are more stable than those that depend on capital value return.
Real estate is also more lucrative and progressive than a number of traditional income return sources. For example, asset investments exchange a yield premium to Treasuries and will not generate returns unless Treasury rates are low.
Real estate investments are supported by a top-notch foundation compared with stocks, and at times, bonds. This effectively mitigates the principal-agent conflict or the extent to which investor interest is subject to the trustworthiness and ability of debtors and managers. Even real estate investment trusts (REITs), regarded as real estate securities, require that a minimum per cent of profits be disbursed as dividends.
Real estate is naturally capable of inflation hedging. This originates from the symbiotic relationship between GDP growth and continuous demand for property. Economic expansion subsequently drives demand, which in turn affects rental prices, which eventually convert to higher capital values. In effect, real estate is capable of retaining purchasing power in the context of capital. The industry rarely falls prey to the dictates of inflation but occasionally does so by increasing the value of their properties.
Another benefit of investing in real estate is its diversification potential. Real estate does not depend on other types of investments. In other words, adding real estate to your financial assets gives you a diverse range of income sources. It also reduces risks. When one asset yields a lower return, your property assets can offset the losses.
The main disadvantage of investing in real estate is illiquidity or the relative difficulty in converting an asset into cash and cash into an asset. Unlike a stock or bond transaction, which can be completed in seconds, a real estate transaction can take months to close. Even with the help of a broker, simply finding the right counterparty can be a few weeks of work.
That said, advances in financial innovation have presented a solution to the issue of illiquidity in the form of listed REITs and real estate companies. These provide indirect ownership of real estate assets and are structured as listed corporations. They offer better liquidity and market pricing but come at the price of higher volatility and lower diversification benefits.
Real estate is a distinct asset class that is simple to understand and can enhance the risk and return profile of an investor's portfolio. On its own, real estate offers competitive risk-adjusted returns, with less principal-agent conflict and attractive income streams. It can also enhance a portfolio by lowering volatility through diversification. Though illiquidity can be a concern for some investors, there are ways to gain exposure to real estate yet reduce illiquidity and even bring it on par with that of traditional asset classes.