What it means
Real assets are things you can, at least in principle, point to and use. A warehouse stores stock, a wind farm produces electricity, a field grows wheat and a gold bar sits in a vault.
Their worth comes from their physical usefulness, scarcity or the cash flow they can produce. In a business, real assets show up as property, plant and equipment on the balance sheet, along with inventory of physical goods.
They are the productive backbone of the company, which is why lenders often take them as security for loans. Because they can be sold or repossessed, they give lenders more comfort than a promise alone.
Investors use the term in a slightly different way. A portfolio manager may group real estate, infrastructure, commodities and natural resources as real assets, and hold them alongside shares and bonds.
The idea is that when prices across the economy rise, the value of physical things and the rents or fees they earn often rise too. That inflation link is the main selling point, but it is not guaranteed.
A building in a weak location can lose value even while general prices climb, and a commodity can fall sharply when supply floods the market. Real assets also tend to be harder to sell quickly, need upkeep, and can carry costs such as insurance, storage and property tax.
A common practical question is how much of a portfolio or balance sheet sits in real assets. The answer shapes how the business or investor responds to inflation, interest rate changes and economic downturns.
Finance teams track it as a simple share of the total.
In practice
Real-world examples.
Example
A logistics company buys a $3,000,000 distribution centre rather than renting one. The building is a real asset that it can use daily, and it also serves as security for a bank loan. If local property prices rise, the value on its books may understate what the building is worth today.
Example
A pension fund allocates 15% of its money to toll roads, ports and farmland. Trustees like these because the income often rises with price levels, which helps match pensions that increase each year. The fund accepts that these holdings are harder to sell than listed shares.
Example
A jewellery retailer keeps part of its cash reserve in gold bars. During a period of rising prices the gold holds its purchasing power well, but the retailer also pays for secure storage and insurance. The finance manager treats those costs as the price of the protection.
Formula
Calculation
Real asset allocation (%) = Value of real assets / Total portfolio value x 100
Suppose a family business holds an investment portfolio worth $800,000. Of that, $120,000 is in a property fund and $40,000 is in a commodity fund, so real assets total 120,000 + 40,000 = $160,000. The allocation is 160,000 / 800,000 = 0.20, or 20%. The remaining $640,000 sits in financial assets such as shares and bonds, which is 80% of the portfolio.Case study
Seen in the real world.
Harbourline Foods is an illustrative, fictional packaged food company with $9,000,000 in cash and a worry that its savings are being eroded by rising prices. The finance director proposes buying a cold storage facility for $4,500,000 instead of leaving the money in the bank.
The facility is a real asset, so its rent value and resale price tend to move with building costs and demand for storage. It would also let Harbourline stop paying $380,000 a year to rent space from a third party.
The board agreed, but only after the finance director added the running costs of maintenance and insurance to the model. The illustrative lesson is that a real asset should be judged on the cash it saves or earns after upkeep, not only on its protection against rising prices.
Watch out
Common mistakes.
- Assuming real assets always protect against inflation, when a poorly located property or an oversupplied commodity can lose value in any price environment.
- Ignoring running costs such as storage, insurance, maintenance and property tax when comparing a real asset with a financial asset.
- Treating real assets as easy to sell, when buyers can take months to find and prices may have to be cut to close a deal.
Questions
People also ask.
Is a share in a property company a real asset?
Not strictly, because the share is a financial asset, although the company behind it owns real assets and the share price reflects them.
Is cash a real asset?
No, cash is a financial asset whose purchasing power falls when prices rise, which is the very reason some people prefer real assets.
Can intangible items such as patents be real assets?
Usually not, because real assets are tangible, and intangible assets are classed separately on the balance sheet.
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