MAIN PROBLEMS OF REAL ESTATE AS AN INVESTMENT TOOL

Abstract

Real estate markets (REM) differ from centralized financial markets in their fragmentation, opacity, information asymmetry and illiquidity. Each property is unique and localized, which hinders standardization and centralized pricing low or negative correlation with that of stocks and bonds, which helps reduce overall portfolio risk. REM act as an effective hedge against inflation.

Traditional methods of real estate valuation  are inflexible and have difficulties in valuing illiquid, large-scale assets or properties with exceeding rents. The growing role of debt financing requires appraisers to have a higher level of financial expertise.

Investment markets are affected by  a short-term approach that prioritises current profits and dividends at the expense of long-term strategic objectives, including Research and Development (R&D) investments. This approach, which is supported in part by financial institutions (although they shift some of the blame to management), is extremely unfavourable for REM and the construction sector due to their long-term production cycle. Short-term thinking exacerbates  problems with illiquidity and the risk of a price collapse in forced sales. Success in the real estate sector requires long-term strategies and a focus on long-term returns.