Performance Comparison – Real Estate & Equity Market Indices

Back by popular demand is an article on the similarities - and differences - between real estate and equity market indices. If you remember from our last article, we touched on the 10-year bet Warren Buffett made with Protege Partners on the Vanguard 500 Index Fund Admiral Shares versus a basket of five hedge funds. Not surprising, over the past eight years Buffett has been victorious, with a ~65% return in relation to Protege’s return of ~22% over the same period.

However, even the Oracle of Omaha can be misguided sometimes, and we pointed out that the returns of a real estate index, either domestic or abroad, would have won the bet over both Buffett and Protege. This has caused many of our readers to request more performance details on our findings. Brace yourself, because the data is staggering, and at the end of the article you just may be a real estate convert.

International Performance Comparison Findings

Let’s first look at the 10-year performance of real estate market industries across various countries and relate the data to the equity market equivalents. This is important because Buffett himself was betting on the long-term performance of the Vanguard 500 Index Fund Admiral Shares. The findings below are not adjusted for dividends or rental receipts to ensure an accurate comparison.

Table 1: International Return Performance Comparison
Compounded Annualised Returns
As at 31 Dec'14 1 year 3 years 5 years 10 years
S&P/ASX 200 -2.9% 3.6% 2.4% 1.7%
A-REIT Index 6.4% 10.1% 9.2% -3.8%
Australian Residential Property Index 8.7% 8.4% 4.7% 5.8%
Hong Kong
Hang Seng Index -5.2% -0.8% -0.8% 3.7%
Hang Seng REIT Index 0.3% 2.0% 4.7% 4.9%
Hong Kong Commercial Office Property Index 4.8% 5.7% 11.7% 13.0%
Straits Times Index -14.2% -3.4% -2.0% 2.1%
URA Residential Property Index -3.7% -2.2% 0.3% 5.1%
United Kingdom
FTSE 100 -5.4% 1.8% 1.2% 0.9%
FTSE NAREIT All Equity REITs Index -2.3% 7.1% 7.9% 2.1%
HBOS Property Prices - London 16.8% 15.7% 10.6% 4.9%
United States
S&P 500 -1.3% 13.7% 10.4% 4.8%
MSCI US REIT Index -3.1% 7.1% 7.6% 2.3%
Moody's Major Markets All Property Index 15.8% 16.9% 13.8% 5.4%

Singapore’s URA Residential Property Index, for example, has a 10-year compounded annualised return of 5.1%. Compare that to the Straits Times Index, and we see 10-year performance of 2.1%, a 3% disparity in long-term returns. Now let’s check on Hong Kong’s performance comparison. The Hong Kong Commercial Property Index has returned a whopping 13.0% over the past 10-years, compounded annually. Juxtapose that with the equivalent Hang Seng Index, which has a 3.7% return over the past 10-years, and it quickly becomes clear that real estate has performed very well throughout Asia.

But the high performance of real estate doesn’t stop there. Australia’s Residential Property Index, for example, has a 10-year return of 5.8% while its S&P / ASX 200 Index has returns of only 1.7% over the past 10-years. The United Kingdom’s HBOS Property Prices for London has returned an annualised rate of 4.9% over the past 10-years while its equity market equivalent, the FTSE 100, has only returned 0.9% during the same period. Finally, even the United States, with its housing market crash and all, has a 10-year return of 5.4% for the Moody’s Major Markets All Property Index, and its S&P 500 only has a 4.8% over the same 10-year period.

Further, Singapore, Hong Kong, the United Kingdom, and the United States all have real estate market indices that have beaten their equity market equivalents in compounded annualised returns for five-year performance, three-year performance, and one-year performance. This means that real estate is not only beneficial in the long-term but is also a good short-term investment.

Australia is the only country on the outside looking in, but not so fast. While its Residential Property Index was not the highest performer in five-year or three-year returns, its A-REIT Index took that distinction, with compounded annualised returns of 9.2% and 10.1%, respectively. It should be mentioned here that for the other countries mentioned that have a REIT index (Hong Kong, the United Kingdom, and the United States), all of them also outperformed their equity market equivalents for each period being measured.

Volatility Comparison Across Real Estate and Public Equities

Ok, I can already hear you saying it: Returns are great, sure, but what about the risk? The dot-com bubble, the 2008 financial crisis, and China’s rising debt levels are all cause for concern. Well, what if we told you that not only do real estate indices provide higher returns than their equity market equivalents, but they also reduce an investor’s volatility.

Let’s look at the numbers. Surprisingly, real estate indices in Singapore, Hong Kong, Australia, the United Kingdom, and the United States have the lowest volatility when compared to both domestic REIT indices and equity market indices. What’s more, the volatility of each of the country's real estate indices are the lowest for a 10-year, five-year, three-year, and one-year period.

Table 2: International Volatility Comparison
Annualised Volatility
As at 31 Dec'15 1 year 3 years 5 years 10 years
S&P/ASX 200 11.5% 9.1% 10.0% 14.2%
A-REIT Index 11.1% 10.7% 10.7% 21.1%
Australian Residential Property Index 3.8% 2.5% 3.4% 4.0%
Hong Kong
Hang Seng Index 23.8% 9.1% 10.0% 14.2%
Hang Seng REIT Index 11.1% 10.7% 10.7% 21.1%
Hong Kong Commercial Office Property Index 3.8% 2.5% 3.3% 4.0%
Straits Times Index 16.0% 10.3% 12.5% 20.4%
URA Residential Property Index 0.7% 1.6% 2.3% 9.4%
United Kingdom
FTSE 100 13.4% 9.0% 11.5% 17.2%
FTSE NAREIT All Equity REITs Index 15.4% 11.5% 12.4% 31.4%
HBOS Property Prices - London 2.2% 3.1% 4.5% 7.4%
United States
S&P 500 13.3% 10.6% 13.9% 16.0%
MSCI US REIT Index 12.3% 14.6% 17.4% 26.7%
Moody's Major Markets All Property Index 2.9% 2.5% 2.3% 5.1%

Taking it a step further, Australia’s A-REIT Index and Hong Kong’s Hang Seng REIT Index also have volatility that’s lower than their domestic equity market indices. This means that these two countries have a lower volatility for both their real estate indices and REIT indices when compared to their equity market equivalents.

Looking at the data, we find that annualised volatility for each country’s real estate index never exceeded 10% for each of the periods being assessed. For example, Singapore’s URA Residential Property Index has a 10-year annualised volatility of 9.4%, a five-year annualised volatility of 2.3%, and 0.7% volatility over the last year, as of Dec 31, 2015. Hong Kong’s Commercial Office Property Index has a 10-year volatility of 8.6%, five-year volatility of 4.9%, and 3.2% volatility over the calendar year 2015. In comparison, the Straits Times Index and the Hang Seng Index never have volatility below double-digit percentages.

Looking at charts of these country’s real estate returns in relation to the domestic stock market indices further drives home the point. The equity market indices for Singapore, Hong Kong, Australia, the United Kingdom, and the United States all show higher volatility over the past 10-years, with steep dips during the 2008 financial crisis, in comparison to the real estate equivalent in each of these countries where we see a smooth and gradual line that increases fairly steadily over time.

ASXA-REIT IndexAustralian Residential Property Price Index
Au chart Source: Bloomberg

Even when the financial crisis struck the housing market, the charts representing each country’s real estate index returns and its REIT index returns display a much smaller dip in performance. Further, the recovery in performance is seen to happen much quicker with both real estate indices and REIT indices, when compared to equity market indices.

Additional Commentary on Real Estate Performance

Now, everything we’ve discussed up to this point does not take into account three things: Rent, dividends, and leverage. If you remember from earlier, all the information we’ve used does not factor in rental receipts or quarterly dividend payments. Surely these affect the returns of real estate and public equities.

Why of course they do, but not in the way you might think. You see, a recent study conducted in San Francisco found that rental prices have increased every year since 1956 and that the average rental increase is 6.6% annually. Compare that to almost any dividend yield of a public equity or basket of equities and it seems like you’ll be hard pressed to find a yield near 7% annually.

So, rental receipts, when compared to dividends, provide a greater annual return of passive cash flow. Further, many REITs actually pay a dividend too. Therefore, if we are to assume that the value of the underlying assets within a REIT increase consistently over time, and that the REIT also pays a dividend or profit shares in some manner, the investment vehicle becomes very attractive when compared to public equities.

And finally, relying on our previous article once more, the ability for real estate to be purchased with leverage, i.e., a mortgage, can increase returns by as much as 50% or more when compared to equities. This is because a higher-value asset, say, a $1 million commercial property, can be purchased with 80% leverage and only $200,000 down. Then, if the asset increases by 10%, the investor is set to earn $300,000 when he would only have earned $20,000 on a $200,000 investment in a public equity with the same percentage gain but without the benefit of leverage.


Well, there you have it. The data supports the fact that real estate is a more attractive investment than public equity equivalents. Now, this raises the natural next question: What are the best real estate investments for you? Could it be a private fund, a private piece of property, a REIT, or something in between? Look no further! Our next article will outline the options in the real estate industry to give you a better sense of what’s out there and what fits your investment preferences.


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