UGANDA, Kampala | Real Muloodi News | For a while, the real estate industry was not even close to being on the same level as equities and bonds in terms of investment. However, when investors sought good returns with lower volatility, as well as greater control over their assets, they deposited more cash in private real estate – a sector that has prospered.
Has the real estate sector has lived up to the expectations and outperformed stocks and bonds in the past? Did real estate provide greater returns for investors with lesser risk over time?
Treasury bills and bonds (TBs) are investments in government debt securities whose rate of return is in the form of interest. Albeit treasury bills are short term, while treasury bonds are long term. Because of the faith investors have in the government that it will pay on these types of investments, they exhibit risk-free characteristics.
Allan refers to them as TBs and highlighted that while comparing real estate and TBs, the latter is usually discussed broadly, hence biasing facts.
Allan points out that in one article he read, someone compared TBs with rental income. Yet, a home is not held primarily for income generation, rendering it baseless to relate it with TBs when deliberating on asset classes.
Investors should measure TBs against real estate established to generate cash flows for a proper and fit appraisal.
To compare the two asset classes with precision, Allan suggests that it requires a rate of return (income, capital gains) computation for at least a 20 year period, which is challenging because of data deficit. Still, even then, past metrics may not help one to forecast future returns correctly.
He says, “Only through a prudent fiduciary approach can the artificial signals or triggers be screened out.”
TBs do not need a huge cash outlay to get started. They are highly liquid and do not require expertise to invest. But then again, real estate offers capital appreciation, a better hedge against inflation, and better tax benefits.
The efficient strategy to grow wealth is ideally a diversified endeavour. Investing in either TBs or real estate should be put to scale against the merits and demerits within the investor’s unique circumstances.
As Allan writes, “One should bear in mind the fact that real estate is idiosyncratic in nature (rental yields for similar properties within the same location differ) and this further complicates any attempts to accurately compare the two.”
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