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How investment property compares with other asset classes over the long term 

When investors are putting together their investment plans either with their financial planners or independently, they generally classify assets into two buckets: risk on and risk off. In the risk on bucket, equities and property are the two main asset classes, whilst in the risk off bucket, bonds and cash are the two main asset classes. So the key questions for most property investors are: how does property investment compare with equities over the long term, and, is investing in property worth the extra risk than comes with a ‘risk on’ asset. We investigate below.

Long term data compiled by Russell Investments (20 years to December 2017) shows that Australian residential property has outperformed Australian equities (shares) with a 10.2% p.a. gross return versus 8.8% for equities. And when compared against other ‘risk on’ asset classes, Australian residential property returns have outperformed: global equities have returned 5.4% p.a. And Australian residential property returns have significantly outperformed the ‘risk off’ asset classes: cash has returned 4.6% p.a., global fixed income has returned 7.2% p.a., and Australian fixed income has returned 5.9% p.a.

Whilst the long term outperformance of Australian residential property versus all other asset classes is impressive, there are a two key factors which make it even more attractive to investors:

  • Lower volatility than equities – As most share owners will know, the stock market experiences periods of high volatility which can be stressful and can push some investors into selling at exactly the wrong time. As residential property is a relatively slow-moving and illiquid market, investment volatility is much lower than for equities. Since most investors equate volatility with risk, this means the risk-adjusted returned in Australian residential property are even more attractive. 
  • Leverage – Most lenders are prepared to lend significantly more against real assets like residential property than they are against equities. This means the potential to generate higher levered returns is much better in residential property. For example, if you own 20% of a property which grows in value at 5% p.a. over and you are paying 3% interest on the 80% mortgage, you’ll earn the full 5% p.a. growth in the value of your 20% stake plus the interest rate differential (5% minus 3%) on the other 80%. It’s a significantly higher return.

Rashed Panabig, Landen’s Director, believes the outlook for Australian residential property remains bright: 

‘With interest rates expected to remain lower for longer and supply-demand fundamentals remaining positive, the environment remains supportive for continued outperformance in Australian residential property. We continue to believe the middle ring suburbs of Sydney offer excellent value within the context of a strong Australian residential property market.’