The Global Financial Crisis that happened 7 years ago was largely triggered by the toxic combination of a housing bubble fueled by the growth of subprime loans. So it is understandable there has been apprehension to real estate as an investment over the last decade. However, armed with the knowledge that real estate, just like any other investment, has it’s upturns and downturns, now is a good time to get back to it, and here’s 5 reasons why.
Strong Risk-Adjusted Returns
The global trend since 2008 has been towards exceptionally loose monetary policy in order to stimulate borrowings and economic activity. The US Federal Reserve has been vacillating whether to increase a record low interest rate for almost the last two years.
While it’s become much cheaper to borrow money, on the flip side, globally, investors have been scrambling to find adequate returns, and it’s been no difference in the Philippines (in fact, it’s become somewhat of a safe haven for capital).
PSBank provides the most competitive 1-year timed deposit rate at 1.5%, and BSP treasury bills fare little better returning 1.878% over the same period.
Contrast that to real estate growth, which has roughly grown at 3.09% since the start of 2015, and over the last ten years, including a downturn in 2009, growth has averaged 7.16% which has eclipsed even the strongest returns from the BSP. This is also competitive with equity returns, while being considerably less volatile.
Backing by Tangible Assets
Unlike stocks, and to most extents, bonds, real estate is, at the end of the day, bricks and mortar. This means an investor is somewhat insulated from the human foibles that other forms of investment introduce, such as within stocks, where you would be hoping for competent fund managers and CEOs, but that’s not always the case especially when you know 86% of fund managers didn’t beat the market last year.
Stable and High Yielding
Over the long term, the greatest return in a real estate asset will come from rental yield. In fact, the Philippines has some of the highest yielding properties in South East Asia at an average of 7.51% yield per year in prime condominium rentals, this is opposed to just 2.83% in Singapore. The Philippines is also peculiar in that it is commonplace to negotiate yearly increases in rental rates exceeding inflation.
This is especially attractive in today’s low interest environment, and it has the added bonus of being able to smooth out the return provided by real estate (even if growth has slowed, you’re still going to have rent! yay!).
We’ve already talked about this in a previous post, but it’s worth mentioning again. Real estate bears low correlation to other asset types. If the stock market is swinging wildly, and the bond market is providing the returns you hoped, at least real estate is largely unaffected by these movements. This means risk is mitigated, failure in your other assets likely won’t lead to a failure in your real estate portfolio.
A hedge against Inflation
Finally, one of the major reasons why real estate is such a fantastic store of wealth is it’s a way to hedge against inflation. There is a strong influence upon real estate values by wider socio-economic factors. As an economy and it’s population expands, expectations for higher standards of living, the requirement for a greater supply of dwellings, and the need for more complex commercial and retail spaces buttress demand for real estate. Higher demand for real estate naturally leads to higher capital values, which eventually leads to higher rental returns.
This means that capital invested in real estate maintains its purchasing power by passing on inflationary pressures to tenants, and the capital appreciation of real estate in an expanding economy overrides the erosion of inflation.