Over the years listed property as an investment has proved to be an excellent investment and indeed over most measurement periods has outperformed local equities. The big question is will this be the case going forward.
The chart below gives an indication of returns across the main asset classes over various periods. Although in nominal terms even over a 20 year period local listed property outperformed equities, because they are less tax efficient on an after tax basis, equities would have slightly outperformed. Nevertheless, listed property has been a superlative asset class with lower volatility when compared to equities.
The 10 years performance produced a nominal 27,8% versus equities of 15,8%.
The total return from listed property is derived from a combination of the income stream – i.e. net rental income and the capital growth (or loss). By its very nature rental income is the far more stable component of the total return. In this respect property has a close relationship with bonds, which are at their core income generating assets.
But when investors are prepared to pay more and more for the listed property for a number of reasons, including generally lower interest rates, then investors augment rental income with capital gains. It’s because of this, that at times listed property displays “equity like” characteristics.
For most of the last 10 and indeed 20 years, this is what occurred. The result propelled the steady rental stream into a superior investment.
Listed real estate index nominal return components
Source: RECM, Bloomberg
As with all investment returns, future prospective returns from these levels are not a function of what happened over the last 5, 10, and 20 years, but more a function of the current valuations.
We will look at this in the week.