🎧The Real Deal about Real Estate and REITs - with Phil Bak

Did you know Real Estate Investment Trusts (REITs) don't always invest in real estate?

Hi! It’s George from Investorama, your guide to the future of investing - without the hype.

Below I’m sharing a few highlights from my latest podcast conversation: a fascinating deep dive into real estate with Phil Bak, the CEO of Armada ETFs, the company behind ‘HAUS’, an actively managed exchange-traded fund that invests in publicly traded REITs.

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I’ve posted this podcast on my main YouTube channel and podcast platforms.

The Real Estate asset class for individual investors

Real estate is the world’s most important asset class.

At over $200 trillion in value, global real estate is more significant than all the shares and bonds combined.

For most of the Western world, that’s where the majority of our wealth is locked in. For example, in the US, the top 10% controls nearly 90% of the stock market, while the bottom 90% owns more than 55% of the housing market:

Ownership of residential real estate is more widespread than stocks and bonds. Yet at the same time, it’s classified as an alternative asset class (like anything that’s not listed shares and bonds).

But it’s also our home, with all the emotional attachment that goes with it. And that means that for better or worse, we don’t always think about it in purely financial terms. Yet, a property's purchase (and sale) is the most impactful financial decision for the middle class.

Property is an asset class we see differently and perhaps less rationally. But we want to look at it from a financial perspective here.

One of its most striking characteristics is that its value doesn’t go to zero. (Even if your house disappears in a fire or earthquake, there’ll normally be some insurance compensation).

From a portfolio perspective, Phil reminded me that many investors are overallocated to their personal homes, sometimes with zero diversification.

Three quotes

REIT doesn’t mean “real” real estate.

REIT stands for Real Estate investment Trust. However, the definition of what is real estate has been expanding as more and more types of companies try to take advantage of the benefits of the REIT tax structure. Now data centres, cell towers are big category of REITs. Anything from student housing, senior housing, facilities, hospitals, all sorts of different products are now categorised as REITs. And that's great if that's what you're looking for, but what I want to warn investors is: Just because it says it's a REIT doesn't mean that you're getting real estate.

And within real estate, different categories may be heading into different paths. Phil was particularly cautious about office spaces, as they may never return to pre-COVID occupancy rates.

The correlations between the different sub-sectors of REITs are very low, meaning that they trade differently than themselves. They're different economies within the REIT world. So where within REITs would you want to be in a more difficult market environment? And for us, that answer is very clearly in the residential space because the residential REITs are generating their income through rents paid.

We also discussed in-depth Blackstone’s BREIT:

I feel like this fund is  now standing on the edge of a cliff,  at a precipice, right?  Not through mismanagement, quite the opposite, right? Through their success, they are, in fact a victim of their own success. And how does that happen?  Well, embedded in this fund is a lot of leverage, and they have raised a tremendous amount of assets. And they own about 120 billion worth of real estate. And they've had so much success and so many assets coming in that  they've been buying all along the way, and all along at the top.

I mentioned this before, discussing the different states of liquidity and liquidity risk, and that we discussed in depth with Phil (19 min onwards).

Thanks a lot to Phil Bak for his time and insights! You can follow him on Twitter and Substack.