Real Assets
Three families
Real assets are physical assets or claims on them: real estate (direct property, REITs, private funds), infrastructure (toll roads, utilities, energy midstream), and natural resources (commodities, farmland, timber, energy, and mining). They are held for income, inflation sensitivity, and diversification.
Valuation and return sources
Real estate: value = NOI / cap rate. Cap rates move inversely to values, so a lower cap rate means a higher valuation. Leverage amplifies both gains and losses. Appraisal-based indices smooth returns, understating volatility and correlation with public markets.
Commodities: returns come from spot price change, roll yield, and collateral interest. In contango (futures above spot), a long position rolling contracts forward loses money - negative roll yield. In backwardation, roll yield is positive. This is the single most tested commodity concept.
Infrastructure and farmland offer long-duration, often inflation-linked cash flows; regulatory and political risk matter.
Traps
- Assuming real assets always hedge inflation; the hedge depends on the sub-asset and horizon.
- Reversing roll yield in contango.
- Ignoring that REITs trade like equities and can decouple sharply from direct property.
- Reporting levered property returns as if they were asset returns.
Worked example
A property generates NOI of $1.2m and comparable cap rates are 6%. Value = 1.2 / 0.06 = $20m. If cap rates fall to 5%, value = 1.2 / 0.05 = $24m - a 20% gain with no change in NOI. That sensitivity is why cap-rate direction dominates real estate questions.