Investing in real estate is seen as a good bet and for good reason, but an analysis of performance over the past decade shows the asset class has lagged some other options.
Bloomberg’s analysis shows that home prices in Toronto in the past decade have increased 127% according to the Teranet-National Bank Home Price Index.
Meanwhile, investing in equities over the same period could have delivered stronger returns with the S&P/TSX Composite Index gaining 157%.
But beating both buying homes and stocks, were real estate investment trusts.
REITS posted returns of 354% (dividends included) since the end of 2008 according to figures from the S&P/TSX Capped REIT Index while the S&P/TSX Composite Real Estate Index, made up of real estate income trusts and other companies in the industry gained 262%.
“You don’t have to worry about things like actual maintenance and keeping the property lease up,” Jenny Ma, an analyst at BMO Capital Markets told Bloomberg. “And also you get the diversification of many properties, across different markets and potentially across different asset types as well.”
She added that REITS also provide advantages for liquidity as buying and selling is fast compared to buying and selling properties themselves.
Vulnerability of real estate
Doug Porter, chief economist of BMO agrees that liquidity and the costs of holding real estate properties – including property taxes and other expenses – does mean that equities or REITS could be a preferred option for some, especially given the housing market’s vulnerability to taste changes and prolonged periods of underperformance.
“Overall, it’s actually quite difficult to properly evaluate real estate returns to equity market returns. And, of course, even then, there’s the issue that you can’t live in your equity portfolio,” Porter said.