Compared to other forms of investments such as stocks and bonds, property as an asset class has tended to provide returns in between those two other asset classes, for a much lower amount of volatility.
While stocks as an asset class has provided a return of 11% p.a. compared to 10 year US government bonds of 5%, there has been a high amount of volatility associated with owning stocks. Remember the dot-com crash in the early 2000’s and the global financial crisis of 2008? If you had $100 in stocks just before the crash, it would have dropped to about $50 and required the next 6 to 7 years before recovering back to its previous peak.
On the other hand, property did not suffer such a large decline in values during those periods, falling only 20% on average globally. The subsequent recovery was also much quicker, taking about 3 years before recovering back to its previous peak. One reason for the quick recovery was that investors began to realize that stocks and bonds did not provide them with the safety they required. Thus they began to turn to real estate as an asset class.
Investors began to heavily invest in the asset classes in the following order: office, retail, residential, industrial then the more alternative asset classes of data centres, aged housing, logistics and student housing.
So why is real estate such a great asset class?
Generational wealth transfer
Property can be passed on from generation to generation, except in countries where there is a leasehold policy in place such as Singapore and China. Save for the leasehold policy, children can inherit the property owned by their parents. In some cases, these properties were situated in the centre of the city as it began to develop. Imagine owning a property in the middle of Beijing, Shanghai, Tokyo in the early 1900’s and as your parents passed it down, you become one of the wealthy landowners with land and property in the city!
Hedge against inflation
Property is a great hedge against inflation because of the way rents and prices are determined. When the overall cost of living in the economy increases, this is reflected in the higher rents chargeable by property owners and sellers looking to sell their property. As a property owner, you can be assured that as the cost of living increases, the value of the property will increase in tandem with it. This cannot be said for stocks and bonds because the price of those asset classes are driven a lot by investor sentiment. As a result, you sometimes can have a growing economy but a stock that has prices that is falling.
Once a property is bought, furnished and fitted out, the income stream is passive. This means that for the next 2 years that the property is rented out, you as a property owner can expect to receive rental income on a passive basis. You won’t need to chase the tenant because they are under contract to pay you rent on a timely basis. You needn’t be afraid of the property being stolen nor being damaged because of strict clauses in the tenancy contract. As a property owner, you can then plan your future with a confidence that you will be receiving rental income regularly.
Tangible asset class
Unlike stocks which most times are just numbers and digits on your trading platform, property is an asset class which you can see, touch and feel. As a property owner, this is a much more fulfilling feeling than owning a large amount of bonds or shares. For example, if you own $1 million worth of property, you can view the property, take photos of it, make sure it’s well maintained and largely be in control of its performance. However, for a stock or bond, you will not be able to do the above because all of it is digitally traded on a stock exchange.
Not marked to market
Another advantage of owning property is that it is not marked to market. What do I mean by that? It means that you don’t receive a daily report on how much your property is worth. This is unlike stocks where you can track the price of your holdings on a daily or even minute basis. Imagine how much headache this can cause you if the value of your stocks fall by 20% overnight! Your $100,000 would become $80,000 in less than 24 hours! The emotional rollercoaster and headache with knowing how much your stocks are worth takes a big toll on an investor’s mindset. This is unlike a property, which Warren Buffet says, does not have â€œwildly fluctuating valuations placed on their holding”.