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What Is the Largest Asset Class in the US? Alternative Real Estate Investment Options

The term “asset class” refers to a group of similar tools of an investment nature. They are grouped based on a similar financial structure. Typically, the following asset classes are distinguished: stocks, money, goods, bonds, and real estate. Within each of them, there are subcategories. What is the largest asset class in the US and worldwide? You will find the answer below.

Largest asset class

Real estate is the #1 asset in the world

The largest and most important asset in the United States and the world is real estate. All private houses, high-rise buildings, office buildings, and other properties located in different parts of the world are valued at a total of USD 228 trillion.

This figure is more than 12 times the GDP of the United States and 18 times the GDP of China. For comparison: all the gold mined in the entire history of humanity is estimated at only USD 7.5 trillion.

If we talk about stocks, the real estate’s total value exceeds the securities’ value by 2.3 times.

Residential real estate makes up most of the world’s real estate – this sub-category is valued at USD 168.5 trillion. North America accounts for more than a fifth of the world’s total residential real estate value, despite being home to just 7% of the world’s population. At the same time, Unlike China or Hong Kong, real estate in India is significantly undervalued.

The second-largest real estate asset class is commercial real estate, which was valued at USD 33.3 trillion in 2017 – nearly half the value of the entire global stock market.

North America is home to the most valuable commercial real estate market, worth USD 9.5 trillion, or 29% of the world’s commercial real estate value. This large market accounted for 31% (USD 8.1 trillion) of all major global real estate transactions in 2017.

The next largest national commercial real estate markets after the US are:

  • China (USD 3.6 trillion)
  • Japan (USD 2.8 trillion)
  • Germany (USD 1.7 trillion)
  • UK (USD 1.7 trillion).

The commercial real estate market’s growth is associated with world GDP growth. Considering that a country such as India, for example, significantly exceeds many other countries in terms of GDP growth, it is expected that in the next decade, the value of commercial real estate there will be higher than in other regions.

Against the backdrop of GDP growth, an increase in the population, and urbanization, experts predict India will soon boom in the global real estate market. This asset class in India will become even more popular among investors from all over the world.

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Key benefits of real estate investment

Unlike stocks and bonds, real estate is a physical thing. Since houses, apartments, and commercial premises are tangible assets, they are unlikely to depreciate to zero, which cannot be said, for example, about securities. As the largest asset class, real estate has a number of other undeniable advantages.

Low exposure to inflation

Real estate value is usually linked to GDP: when the economy grows, the demand for real estate tends to grow with it. Accordingly, rents and real estate prices rise, allowing for maintaining the invested capital’s purchasing power.

Rising property prices

Usually, real estate located in a promising region adds value over time. Modernization of the facility also increases its value. Therefore, it is believed that the presence of promising real estate in the investment portfolio is a profitable step.

Real estate can generate income

Renting out properties can provide a predictable monthly cash flow if the total rental income exceeds mortgage payments and operating expenses.

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Cons of investing in real estate

Of course, it is impossible to call such an asset class as real estate absolutely safe and reliable. Such investments also have their drawbacks. Thus, the cost of houses, apartments, and offices is strongly influenced by external factors such as armed conflicts, epidemiological situations, natural disasters, and force majeure in the form of fires and floods. Also, the location of this asset class plays a significant role in its liquidity level.

The smaller and more inconspicuous the town is, the lower its real estate value will be. The property needs to be maintained in good condition, which also requires additional investment. In addition, you should pay taxes, periodically make repairs, and pay utility bills. But if you approach the choice of a suitable investment object with the necessary degree of professionalism, you can minimize the risks.

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Alternative investment options in the real estate sector

Real estate as an asset class is usually represented by residential buildings, apartments, and offices. Such objects are bought to be rented out or sold later. These subcategories have long and firmly taken their places in investment portfolios. However, several attractive alternative real estate assets have emerged over the past decade, guaranteeing investors stable and predictable cash flows. Earnings in some of these real estate sectors have the added benefit of being counter-cyclical and less correlated with conventional real estate earnings. Therefore, adding such alternative objects to an investment portfolio allows you to diversify it.

Below we have listed six of the most popular alternative real estate assets attracting the attention of institutional investors worldwide.

1. Co-working spaces

Co-working space is a room with a large area, divided into separate compartments/zones with Internet access and equipped with office equipment necessary for remote work and other useful options. Many co-working spaces also have conference rooms, meeting rooms, and recreation areas. Thus, the tenant can not only work but also hold meetings with clients and trainings, and just relax there. Co-working spaces are actively used by freelancers around the world. The owners or operators of such offices usually offer their clients a full range of services: concierge service, Internet access, conference rooms, cafes, bars, and even fitness clubs.

According to Colliers, a global real estate consultancy, in April 2019, there were more than 15,000 co-working spaces worldwide. There are 53 co-working offices in Dubai with a total area of 650 thousand square feet, which is 130% more than in 2015.

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2. Student residencies

According to JLL forecasts, from 2011 to 2025, the number of university students will increase from 165 to 263 million. Nowadays, most students come to study abroad from China and India.

Usually, students from different countries study at international universities. Representatives of more than 50 nationalities study in some higher educational institutions. This factor provides investors with additional diversification because the likelihood that all these countries will immediately default or have difficult economic times is minimal. And this means that rental income will come in any case.

The advantage of investing in an asset class such as student residences lies in their continued popularity and demand. The occupancy of such facilities rarely falls below the 90% mark. In addition, the cost of entering the market, in this case, is relatively low – from USD 20 thousand. Student real estate is considered one of the most low-risk investments.

Nowadays, most of these projects are concentrated in the UK, US, and Australia, where global companies such as GIC (Singapore) have invested in specialized operating platforms.

However, the UAE has the largest number of branches of foreign universities in the world, and the Dubai Academic City is an educational center with about 24,000 students studying at various local and foreign universities. For them, the UAE is also actively building new student residencies.

3. Data centers

A data center is a facility that provides customers with a safe and secure environment for hosting servers and other computing equipment. Such storage centers usually have reliable uninterruptible power supplies and special cooling equipment.

Google processes more than 40,000 search queries every second. Every minute, 16 million messages are sent around the world. Over 300 million photos are uploaded to Facebook daily. Every day, 2.5 quintillion bytes of data are created.

As online market research company Statistica reports, the number of people using the internet has grown from 1 billion in 2005 to 4.66 billion in 2020. According to some estimates, 90% of all the data available on the web has been created worldwide in the last five years. The world is sorely lacking space to store all these terabytes of information.

According to Structured Research, global data center market revenue is growing at 16% annually.

4. Nursing homes

New global demographic trends make a compelling case for investing in aged care facilities. Life expectancy in Asia has risen significantly in recent decades, driven by new developments in health care and an increase in overall well-being. Against this backdrop, by 2050, the region’s elderly population (aged 65 and over) is expected to nearly triple to 945 million. The number of people aged over 75 (who need help with daily living) will rise from 137 million to 437 million over the same period.

The so-called American baby boomers (the demographic group currently between the ages of 55 and 73) already make up the largest population category. Although baby boomers are relatively far from becoming residents of nursing homes (the average age of their residents is 83), it will only take about ten years for the situation to change.

The advantage of investing in such an asset class can be identified as guaranteed demographic demand in subsequent years. Society is rapidly aging, and life expectancy is increasing. Residents usually stay in age cate establishments for the rest of their lives.

This trend is especially noticeable in developed countries. If, for example, you invest in nursing homes located in Germany, then you don’t have to worry about the safety of your investment. Social, economic, and political stability with a highly professional judiciary and civil services provide a solid investment base. In addition, since 2006, the German property market has been growing rapidly, which guarantees a stable demand for real estate.

Age care facilities are an attractive investment and have the potential to offer higher and more consistent returns than many other real estate asset classes. Nursing homes are long-term leases.

According to a recent PwC report on emerging real estate trends, over the past ten years, private equity returns for nursing homes have outperformed other commercial real estate in both valuation and income generation.

5. Warehouses for storing goods

More than 30% of startups, small businesses, and online stores rent warehouse space to store their goods. Ordinary citizens also often store their property in warehouses. For example, the average home size in urban cities like Hong Kong, Singapore, and Tokyo is less than 800 square feet. Therefore, people are forced to save themselves by renting warehouses, as they simply have no space to place their things.

Demand for individual storage facilities, as well as for regular classes of real estate, is driven by economic and demographic factors. Urbanization is an essential driver of this sector, as a larger urban population means less living space in cities and more tenants who move more often than homeowners.

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6. Refrigerated warehouses

With the growth of the e-commerce and grocery delivery sectors, the demand for free space in refrigerated warehouses has also increased. Global trade in perishable goods is proliferating in proportion to the growth of the middle-class segment in emerging markets.

In July 2020, the USDA (United States Department of Agriculture) reported that a total of 2.5 billion pounds of chicken, turkey, beef, and pork were stored in the country’s refrigerated warehouses, the largest on record.

The perishable food market is relatively recession resistant. In addition, the need for cold storage for pharmaceuticals has also increased due to the growing older population in need of refrigerated medicines, such as insulin.

Conclusion

Although real estate is not highly liquid (after all, it will take some time to sell an object), investors still tend to include this asset class in their investment portfolio due to stable returns and possible capital gains. In addition, real estate, as part of a portfolio with multiple asset classes, offers investors the benefits of diversification due to its low correlation with stocks.

However, such investments can be vulnerable to economic cycles, and illiquidity tends to increase losses for investors willing to go out of business during an economic downturn.

Typically, this asset class is included in a conservative investment portfolio along with bonds, stocks, precious metals, and bank deposits. At the same time, experienced investors prefer to invest in real estate objects located in countries with stable economies (Germany, France, Great Britain, the USA, etc.).

For questions about buying real estate in the developed countries of the world, please contact our experts at [email protected].

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