Approach towards investment
The successive crucial decision investors are obliged to make after deciding the type of asset to invest in is the investment style or approach towards investment. Since most common forms of investment styles are active and passive, the interpretation and usage of these terms may differ for investors and portfolio managers operating in the real estate and securities market.
Active
Active investing by investors involves sourcing, acquisition, leasing, management and disposal, entirely by themselves as the owners inclusive of receiving the consequent income the property produces. Ability to attain investment-grade assets and generate profitable returns are usually overlooked by investors due to absence of independent and relevant expertise required at various phases throughout their investment journey.
The fundamental ideology encompassing this approach involves attaining maximum-possible passive income through property investment; however, securing these outcomes are highly uncertain in cases where the strategy is undocumented, unevaluated or unjustified.
Active investment style requires a justifiable investment strategy in order to add value and maximize returns exceeding those achieved by a benchmark or index within an established risk tolerance through the active management of either or both the overall portfolio and assets within it. Additional limitations arise due to low quantity of assets in the portfolio for diversification purposes and also when investors are exposed to unlimited risk through liability and mortgage.
Passive
Passive investing by investors involves outsourcing their real estate investments to proficient managers. Although the investor here owns and provides capital, they are not directly involved in any sourcing, acquisition, leasing, management and disposal of assets as they principally rely on the contracted managers service at various phases of their investment journey in exchange for a fee or a fragment of profit from the investment.
Investors possessing relatively higher number of assets or institutional investors with vast diversified assets requires engaging a portfolio manager due to overall perceived risks and complexity. Typical strategy here is to coherently replicate or pursue a benchmark or index, and closely achieve the risk-return profile of that benchmark or index over time.
Further complications arise due to selected benchmark or index normalizing the uniqueness of individual assets in terms of their age, purpose, specification, tenants, lease terms, capital value and investment returns. Plausible approach would be to evaluate the returns against the selected benchmark or index consisting of the most similar assets in order to minimize tracking error. Since an optimal portfolio can possibly outmatch the performance of the selected benchmark or index, generation of such systematic outperformance is not simple to achieve as per market evidence.