Living space is a fundamental human requirement. Long before the coronavirus pandemic, it was clear that where and how you live have a major impact on your quality of life.

From an economic perspective, few things are as secure and sustainable as demand for living space. And where demand exists, there’s also money to be earned – which is why investors should also consider the real estate market.

It is a very unusual market, however. First and foremost, this is because living space is a very personal matter. Earning money from it is not always top priority. For example, there are various cooperatives that do not generate any return, but instead provide discounted rents.

The real estate market is not exclusively for major investors

Real estate is also special because each property is unique. Shares make exchange-listed companies easy to trade, but this is not the case with real estate. Valuing an individual property is a complex process. For many people, investment in entire properties or in their own home is beyond their financial means.

Despite this, returns can still be generated on the real estate market. The real estate market does not have to be exclusively for major investors. It’s also worth investing small amounts to purchase real estate fund units. Many of these funds are exchange-listed, which means that their units can be bought and sold on a daily basis. However, their prices are not a one-to-one reflection of the prices of the real estate purchased by the fund. This would not actually be feasible, as the price of the real estate itself is estimated by experts only at lengthy intervals. The difference between the price of the fund and that of the real estate is known as a premium – we’ll come back to that.

A long-term approach and diversification

Real estate investments are not without risk. Property prices will not necessarily always go up. There is also currently uncertainty as to how the market will develop in future. The coronavirus crisis may result in greater value being placed on living space in the long term, which could increase the demand for residential property. Conversely, employers are cutting back on office space due to the trend towards working from home, which may have an adverse impact on commercial property prices. The low interest rate policy is also leading to a constant increase in the supply of real estate and a rise in vacancy rates. It is difficult to predict how these changes will impact on supply and demand.

This means that, as in other asset classes, adopting a long-term perspective is the best approach when it comes to real estate. Investors should not focus primarily on short-term fluctuations, but instead on the fact that living and working space play a key role in society. For this reason, real estate funds are a key element in the portfolios that we manage. This enables our customers to benefit from long-term developments on the real estate market, while ensuring phases of weak performance are withstood thanks to diversification with other asset classes.

In the investment committee, we also evaluate the premiums – in other words, whether the valuations of real estate funds diverge too far from those of the properties managed by the fund. We regard a sharp rise in premiums as a sign that a more cautious approach is required. Premiums have recently reached record highs that are barely sustainable, leading us to realize gains and give the asset class an underweighted position in our portfolios for the time being.