Why real estate continues to outperform other investments [7/23/2010 7:38:14 AM]

By Strepies Van Wyk, principal of Realty 1 IPG Cape Agulhas

While there's no arguing that South Africa's real estate market is still struggling to regain its momentum on the back of the 2008/2009 global economic crash, it has nevertheless managed to outperform traditional investment vehicles such as stocks and shares.

According to Old Mutual, SA real estate delivered returns of 18.5% over five years and 21.2% over ten years in the period December 1998 to December 2009, outperforming the capital market by 2% over five years and by nearly 7% over 10 years.

Says top real estate performer Strepies van Wyk, “Real estate gives the investor high returns with reasonable risk. This is opposed to stocks, which promise high returns and high risk; bonds which, though less risky, are vulnerable to inflation and tend to deliver unimpressive returns; commodities which, though tangible and good hedges against inflation, are very risky and volatile; and cash in the bank, which might be safe but delivers poor returns.

”She adds: “One of the reasons for real estate's ongoing upward performance is its tangibility. While you can't touch or look at stocks and shares, property is not only physical but its value can be enhanced. Bear in mind, too, that real estate investors enjoy ownership and control of their assets – despite the fact that many tend to finance their purchases with OPM (other people's money)”.

It's also reliable. “People are increasingly realising that property values tend to double every seven to eight years, whereas other investments come and go.

Testimony to the potential of real estate for wealth creation are Donald Trump, Donald Bren (the world's richest property tycoon according to Forbes.com), Stanley Ho (one of Asia's wealthiest people) and Akira Mori, one of the richest men in the world.

While property values can remain static or even decline as a result of an economic trough, she points out that overall through the ages, negative inflation is relatively short-lived.

Furthermore, on the rare occasions that values level out or even turn down, at least there won't be a complete or irreversible loss of value.

“Something else to consider is that when capital growth slows, owners of income-generating properties can look forward to increased rental demand and returns while benefiting from tax advantages and better-than-gold inflation hedging,” she says.

“Further, with real estate, your capital investment can withstand adversity better than most, if not all, others.”

A word of caution though. “If you don't take cognizance of three critical components required to make a good, long-term real estate investment, namely location, sensible leverage and return on investment (ROI), your investment could end up disappointing.”