What are Real Assets?
Real Assets are tangible resources, namely real estate, infrastructure, and commodities, with an intrinsic value tied to their utility, i.e. ability to produce goods or services.
Real Assets Definition in Economics
A real asset can be described as a tangible asset that possesses value due to being able to produce goods or services.
The core purpose of real assets is the generate revenue and profits, so the intrinsic value of these assets stems from their utility with regard to productivity, i.e. the capacity to produce and generate cash flows.
From a broad perspective, all the wealth creation within the economy is thereby determined by real assets and their productive capacity.
There are three main categories that comprise the asset class, which are each defined in the table below.
Real Assets vs. Financial Assets
Financial assets represent claims against an underlying company, so the value of financial assets depends on the underlying asset, e.g. a corporation that raised capital through selling shares or issuing debt.
The relationship between real and financial assets is that financial assets represent claims to the income produced by real assets.
Land and machinery are “real” assets, whereas stocks and bonds are “financial” assets.
- Issuer: Financial assets appear on the liabilities and equity side of the balance sheet.
- Owner: Financial assets appear on the assets side of the balance sheet.
One drawback to real assets compared to financial assets is that real assets are less liquid because the marketplace has less volume and trading frequency.
Thus, the price reflected on real assets tends to be a rough estimate with a much larger spread than for financial assets, i.e. there is less market efficiency.
Conversely, financial assets trade hands each day, and the price reflected can be updated in “real-time.”
The valuation of real and financial assets shares many similarities, such as being largely related to their ability to produce cash flows, but real assets are recorded at their historical value and reduced by depreciation, if applicable.
On the other hand, the market value of financial assets is often readily available to observe.