Private Real Estate Long-Term Recessionary Returns Exceed Risk-Free Returns: Analysis
Given the steady rise in interest rates, the age-old adage that real estate investing is a long-term strategy has never been more accurate. The issue of whether now is the right moment to invest in real estate is in the spotlight as values decline and a recession threatens.
Amid economic uncertainty, investors have steadily rotated into risk-free assets such as money market funds, which are yielding more than the SP500, and out of riskier asset classes in recent months amid economic uncertainty.
But Origin Investments, a real estate fund manager, produced an analysis highlighting investments in private real estate generated higher returns that money market funds, high-yield savings accounts and short-term Treasuries over “seven- and 10-year holding periods in the last three major recessions.”
According to the analysis, the surge of capital into risk-free assets may not capture the whole story given the average return for those investments is about 4% compared with the annual inflation rate of 4.9%.
“Recent trends demonstrate that many investors have found the flight to safety to be a more attractive strategy than any risk-exposed asset classes such as private real estate or public equities, despite risk-free returns that don’t even match the rate of inflation,” said Vince DeCrow, Vice President, Origin Investments. “Yet historical data, when looking at private real estate over seven- and 10-year horizons, reveals that real estate has produced greater returns; sometimes much better.”
Using data from the National Council of Real Estate Investment Fiduciaries (NCREIF) and the Treasury Department, Origin found that over the last 13 years the annualized return for two-year Treasury notes, when rolled over, was 3.24% compared with 7.6% for the National Council of Real Estate Investment Fiduciaries (NCREIF) Open Ended Diversified Core Equity Index Fund, an industry benchmark.
Moreover, in the last three recessions, private real estate returns over a seven-year period were greater than two-year Treasury notes during the dot-com bubble burst and the GFC. Over those three periods, private real estate generated a 5.9% annualized return compared with a 3.8% return for Treasuries.
The 10-year holding period increased returns and “proved to be more lucrative for private real estate in all three recessionary periods,” generating a 5.6% annualized return compared with a 3.5% return for Treasuries.