The real return on Real Estate

An investment in Real Estate can provide both income and capital gains to the investor. In analyzing the returns on their investment portfolio, many believe that Real Estate as an asset class has shown to be one of the most lucrative over the long term. It is often said that “You cannot lose with brick and mortar” and that the best way to accumulate wealth is through real estate. Real estate can be a great investment, but as with all asset classes, understand all costs associated and avoid overconcentration. A well-diversified portfolio helps to maximize your profitability while reducing risks.

When calculating the returns on a real estate investment, it is important to include all associated costs. From my experience, investors sometimes ignore costs that are not included at the time of purchase, and these do erode your actual returns/yields. These hidden or ignored costs include repairs, maintenance, taxes, and insurance among others. There is also the cost of your time spent in maintaining and repairing a property. Be sure to account for these when calculating your overall return on a real estate investment. If we simply use the purchase cost, the income generated and the price movement on a property in calculating our return, our return would be overstated. Income and capital gains can be significantly eroded when these hidden costs are included.

As a benchmark, looking at some of Jamaica’s leading Real Estate Investment Trusts (REITs) and their performance in 2022, their Net Operating Income over the period ranged from 4.36% to 7.10%. This gives a reasonable idea of actual returns made in the real estate market. Similar or greater returns can be achieved by investing in other asset classes. Global bonds for example, have similar characteristics to real estate investing with both providing income and both having the potential for capital appreciation.

One advantage of the global bond is that there is much more liquidity and none of the hidden fees. The turnaround time to buy or sell a global bond is usually 3-4 days as opposed to lengthy real estate transactions. In the current bond market, an investor can even find a BBB rated bond with 6 years to call, yielding 9% per annum. So, while investing in Real Estate can be a positive for your investment portfolio, comparisons indicate that in the current market there are opportunities to buy bonds and other assets with higher yields and less hassle.

Furthermore, a Bank of Jamaica report showed that between 2013 and 2018, the 5-year average real estate price appreciation across Jamaica was 3.3% and 4.2% in Kingston. Between 2019 and 2021 however, there was a significant increase seen in the rates of appreciation. There was a noticeable difference also between price movements in different categories of real estate. APARTMENTS appreciated 28.7% between 2019 and 2021 while TOWNHOUSES appreciated 52.4%. The average price of an apartment increased from $20.2 million to $26 million during the period while the average Townhouse price increased from $22.7 mil to $34.6 mil. This shows that more value was to be gained from investing in a townhouse than an apartment and that investors should analyze the different real estate market segments to determine where the best value is.

In conclusion, Real estate can add value and diversification to your portfolio, but there are other asset classes with comparable features and less hassle. There are also segments within the market that outperform others. Don’t overinvest in real estate and be sure to track your real return. Speak with a licensed financial advisor to look at opportunities in the market and make the most informed investment decision.

Dwayne Neil, MBA, is the AVP, Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm

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