The global economic recession of 2008 is often linked to the United States housing bubble and subprime mortgages. In the aftermath of the recession, there was much negative sentiment over the real estate sector and few were inclined to consider investments into the sector, in a positive sense.
Tutorial: Exploring Real Estate Investments
However, real estate investment is simply the purchase of a future income stream from property and quite undeserving of the tarnish to its reputation. Here are some of the key reasons to invest in real estate. (For a complete look back at the mortgage meltdown, check out our Investopedia Special Feature – Subprime Mortgages.)
Competitive Risk-Adjusted Returns
Based on data from the National Council of Real Estate Investment Fiduciaries (NCREIF), private market commercial real estate returned an average of 8.4% over the 10-year period from 2000 to 2010. This credible performance was achieved, together with low volatility relative to equities and bonds, for highly competitive risk-adjusted returns.
Critics would argue that the low volatility characteristic of real estate is the result of infrequent real estate transactions. This means that property values are often determined by third-party appraisals, which tend to lag the market. The infrequent transactions and appraisals result in a smoothing of returns, as reported property values underestimate market values in an upturn and overestimate market values in a downturn.
While it’s true that historic estimates of real estate volatility should be adjusted upward, real time markets are vulnerable to sudden unexpected shocks. A good example of this would be the “Flash Crash” of May 2010, when $1 trillion in stock market value was erased in just 15 minutes. In an environment where market volatility is an issue and the dynamics of algorithmic trading are murky, the more stable pricing of real estate is attractive.