Stocks vs. Real Estate

[RizwanKhan]

The period from 2001 to 2006 has seen boom periods in real estate, but in the long run, stocks have a tendency to do better. Francisco and Ibbotson in their study have found that in the years 1978 – 2004 the housing sector has annual returns of 8.6% while the commercial sector has annual returns of 9.5%. However, HFI P, a hedge fund of funds, earned significant better 13.4%. Other quotes experts, Robert Shiller for example, expect real estate returns will be down to 3%. Anyway, equity REITs which target commercials properties haven’t disappointed either with returns of 14.8% which is encouraging.

Construction companies in Pakistan have also seen opportunities in the commercial sector, reflecting the global trend of robust returns in real estate investment.

[fut]

Performance


Real estate has packed quite a punch of late, appreciating 12.4% annually between 2001 and 2006, according to the S&P/Case-Shiller U.S. Home Price index. That clobbered stock prices, which gained only 4.3% a year as measured by the S&P 500.

But over the long run stocks win easily. A new study by Jack Clark Francis, a finance and economics professor at Baruch College in New York City, and Yale's Roger G. Ibbotson compared the annual returns of real estate from 1978 to 2004 compared with those of 15 different "paper" investments, including stocks, bonds, commodities futures, mortgage securities and real estate investment trusts (REITs).

The results? Housing delivered a solid but unimpressive annualized return of 8.6%. Commercial property did better at 9.5%. The S&P, however, delivered a crushing 13.4%.

Other studies argue that real estate's returns are much worse. Yale finance and economics professor Robert Shiller, author of Irrational Exuberance, who looked back to 1890, contends that only twice has real estate produced truly outstanding returns: after World War II, when returning troops were starting their families, and from 1998 to 2005, a period he thinks is a bubble.

Housing's rate of return, he argues, has to trend back to the mean of about 3% a year - barely above the inflation rate. If that's starting to happen now, he says, we could be facing many years of losses.

Before you decide that real estate is already down for the count, though, consider this: Equity REITs, which own stakes in commercial properties, were among the best performers in the Francis-Ibbotson study, with annual returns of 14.8%. But REITs are stocks, after all.