Real estate investing vs property investing: is there a difference?
The terms ‘real estate’ and ‘property’ are often used as one and the same, something that's particularly apparent when discussing investment opportunities across the Atlantic where real estate is the dominant term for anything property-related.
And whilst here in the UK property is the default phrase, there can be a subtle difference between the terms, particularly in the world of property investments - and it's often seen at different ends of the investing landscape.
For instance, property investing by groups such as institutional and corporate investors are at a different level to everyday and even many professional investors. This is due to the money they have readily available to invest, what they want to achieve by investing in the sector and also the type of assets they’re investing in within the same class.
Importantly, for the most part the terms are interchangeable and any distinction is generally only seen within specific circles in the investing landscape. But with that said, it can be interesting to understand what the distinction is and when it's used.
Real estate investing
Generally speaking, real estate investing is used to describe the opportunities embarked upon by institutional and corporate investors.
The property investments made by these types of investors usually involves acquiring portfolios of properties or acquiring a smaller property developer and their portfolio/sites as part of the merger. It's very much on the largest level of property investing.
An example of real estate investing would be the potential merger announced late last year between Hammerson and Intu in a £3.4 billion deal. This all-share takeover by Hammerson will create one of the UK’s biggest property companies, creating a £21 billion shopping giant. John Strachan, Intu chairman said, “A combination of both Intu and Hammerson will create a more resilient, diversified and stronger group that we believe will benefit all our stakeholders.”
Alongside this definition of real estate investing, however, is another use of the term that's potentially more popular: Real Estate Investment Trusts (REITs).
On the highest of levels, REITs allow investors to access and own property assets indirectly, as opposed to having to own property themselves in order to invest. One of the key differences with a REIT is that the taxable income made by the trust is distributed to shareholders as dividends and therefore the usual double tax - corporation tax and tax on dividends - is eliminated.
Moreover, a REIT will usually have a diversified portfolio, helping to average out the highs and lows of investing in a single property, therefore reducing the level of risk to the investor.
Typically used to describe the investment made by professional investors and individuals, property investments made by such investors will generally be into the purchase of single properties or units for rental to a single or small number of occupants.
This may also include the purchase of small portfolios of residential rental properties from a similar investor, such as 10 small starter homes to rent to young people or small families in a town setting.
Moreover, individual property investors have recently started embracing opportunities in the purchase of shares in crowdfunded property opportunities, allowing them to invest with other investors into property they may not have otherwise had the ability to become involved in.
Using Chilton, Cathedral Gates as an example, an investor can invest from as little as £1,000. This is targeting a return of 1.5x money within a 18-22 month rolling development and sales period (therefore potentially delivering a £15,000 return from a £10,000 investment within two years). This type of property investing is very appealing for an investor as an asset backed and relatively short-term investment opportunity, as opposed to SEIS/EIS investing in startup companies which, although could deliver higher returns, is more risky and usually longer term.
As I said above, the terms 'real estate' and 'property' - when it comes to investing - are interchangeable for the most part. Using one over the other won't cause issues, but whilst property is undoubtedly the more dominant phrase, real estate clearly isn't something that's only used in America.
Generally differing at the level of investment made and size of properties or portfolios acquired, there are some key differentiators as a result:
- Capital investment - the amount of capital invested, especially in independent deals, varies greatly between real estate and property (the examples above are ideal to showcase this - £3.4 billion in the Hammerson 'real estate' deal against £400,000 for the Chilton 'property' investment opportunity).
- Risk - the difference here is often seen between high-risk commercial portfolios and smaller residential property portfolios. Typically, the needs of businesses are more volatile in an emerging digital-first world than the needs of residents requiring somewhere to live, which will always remain in some derivative. Real estate would generally account for the former and property for the latter.
- Potential yield / ROI - this in the main varies by opportunity as opposed to by type of investing, but a large venture capitalist who owns a profitable shopping centre and sells it to an acquirer is more likely to make a larger return than an investor selling five terraced rental houses to a similar investor; however this is market dependent and is in line with supply/demand for the sectors (again, the former being real estate and latter property). This can also differ greatly by the original acquisition time and what the market was like at this point, and also the situation under which the sale takes place (e.g., to save a company or investor from bankruptcy).
- Type of investor - arguably the most notable difference is who is actually using the terminology. Generally speaking, your institutional investors will be investing into real estate opportunities whilst your individual and retail investors would usually be looking at property investment deals.
Investing into property or real estate
Regardless of whether you're using the phrasing real estate or property, investing into opportunities under these umbrella terms can be vast, varied and full of potential.
We've talked about the opportunities of property investing and the specifics of each, and our guide goes in-depth on explaining how you can integrate property investments into your portfolio, all with the aim of providing you with the information and resources you need to expand your knowledge of investing into property (or real estate!).