Real Assets
What to know
Real assets span commodities, real estate, infrastructure, natural resources, and timberland/farmland. Commodity futures total return = spot (price) return + roll yield + collateral yield; backwardation (futures below spot) produces positive roll yield for a long position, contango produces negative roll yield. Real estate is valued with the cap rate (value = NOI / cap rate) and organized along the core / value-add / opportunistic risk ladder; leverage changes the equity return and its volatility. Infrastructure splits into regulated, contracted, and merchant revenue, with brownfield versus greenfield construction risk and finite concession lives that create terminal-value issues. Natural resources include upstream, midstream, and royalties. Timberland returns combine biological growth, land appreciation, and harvest timing, with land value at highest and best use providing a floor. Appraisal smoothing understates reported volatility.
Traps
- Reversing the sign of roll yield in contango versus backwardation.
- Asserting commodities hedge inflation over short horizons - spot prices may, but futures returns need not.
- Confusing cap rate with the levered equity return.
- Ignoring that leverage magnifies both gains and losses in real estate.
Worked example
NOI is 1.0M and the cap rate is 5.0%, so value = 20M. With 60% LTV debt at 4% interest-only: interest 0.48M, equity 8M, cash flow 0.52M → cash-on-cash 6.5% versus 5.0% unlevered. If cap rates rise to 5.5%, value falls to 18.18M (−9.1%); equity falls to 6.18M, a 22.7% loss - about 9.1% × 1/(1 − 0.60) = 2.5× leverage multiplier.