Why is it Worth to Invest in Property?
The article topic Property Abroad
5 Jul 2012
Real estate is a well established asset class amongst professional investors. It has the potentail to generate profits both through capital appreciation (increase in the value of the property over time) and through regular rental income (rental "yield").
Both experienced investors and ordinary people like to invest large proportions of their wealth and savings into tangible assets such as property, as opposed to financial securities such as equities or bonds. This view of property as a way to "store value or wealth" tends to intensify during economic crisis.
However, given the costs associated with the purchase and sale of property, and the fact that property is a less liquid asset than common shares, bonds or currencies, property tends to be perceived as more suitable for long term investors (i.e., those looking to maximise the value of their assets over a horizon of more than 5-10 years).
So... is property really a sensible investment, or investment in real estate can only be explained by the comfort of owning a tangible asset?
Long-term data, dating back several centuries (source: French National Office of Statistics, Professor Shiller "Irrational Exhuberance", Professor Rogoff "This time is different"), shows that in the long term property prices increase slightly above inflation, in all countries where long term data is available. Consequently, total property returns, which are the sum of property price increases plus the rental income, exceed inflation substantially in the long term.
This trend has accelerated in recent decades, as population has boomed globally (global population has grown from 3 billion people to 7 billion people in only 50 years) - average space per person has become more scarce and valuable, so the value of property has risen well above the average inflation rate in most parts of the world.
In terms of risk or volatility, the common “intuition” that property prices are less volatile than equity shares is also confirmed and documented in many studies comparing the behaviour of different asset classes over the long term (e.g., Professor Shiller’s “Irrational Exuberance”, analysing two centuries of data).
Taking into account the combination of consistent long term returns above inflation plus lower volatility than shares, it’s easy to understand why property appeals to such a broad range of investors.
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