What is a real estate fund?

Types of real estate to invest in

Advantages of a real estate fund

Real estate funds and potential disadvantages

The Italian statistical institute Istat reports that "overall, between 2010 and 2018, house prices grew by 15% in the EU and 11% in the euro area". Investors have broadly two ways to take advantage of the trend growth of this asset class: a) investing directly in a property by buying it; b) acquiring shares in a real estate fund.

Types of real estate to invest in

By real estate, in this case, we mean different types of assets, corresponding to their use. Below are some of the most relevant ones.

• Residential use: flats, villas and buildings for residential purposes.
• Commercial use: hypermarkets, supermarkets, shopping malls and so on.
• Tertiary use: the offices and administrative headquarters of commercial activities.
• Logistics use: storage warehouses.
• Industrial and production use: factories and warehouses related to the production of goods.

Advantages of a real estate fund

A real estate fund is a financial instrument that enables a concrete real estate asset to become a financial asset. This implies that a real estate asset can be divided into financial shares, which can be subscribed by savers/investors. The advantage it offers therefore is twofold: (i) it makes it possible to invest in the real estate market for less money than would be involved in purchasing a property; (ii) it makes the investment more liquid than it would be if it were an entire physical property.

Investing in real estate funds therefore allows investors to exploit the potential of the real estate market without having to buy a property directly. It is a type of investment that, if well diversified, represents a potential source of returns over time, on average considered to be safer than more aggressive forms of investment. Moreover, the real estate component can itself represent a risk diversification factor within a portfolio.

Real estate funds and potential disadvantages

A potential disadvantage of a real estate fund is that it is an investment instrument typically oriented towards the medium to long term (from a minimum of ten years up to 30 years). This means that subscribing to a unit involves participating in the fund for a long period of time without being able to dispose of the invested capital. Trading the fund share on the market before maturity, in fact, runs the risk of liquidity problems. The risk lies in selling units in a fund at a lower price than the purchase price. The low liquidity of this type of investment therefore makes the form of the closed-end investment fund typical.

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In this article, we mentioned other topics that you may find useful to explore:

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