What's the ideal weight of your real estate?
During a conference one of our customers asked an interesting question about the ideal weight in Real Estate for personal investors.
To answer to that question, and if you don't mind, I'd like to start with a global statistic. What's following you the exposition for High Net Worth Individuals (HNWI*) in real estate investments? (Out of their own residence)
You'll find the answer here below through a research done by Cap Gemini and RBC Wealth Management.
What do we observe ?
European Investors have 23,4 % of their assets invested in real estate which is a little bit more than the world average of 18,7% (slowdown of 1,3 % since 2013).
It's interesting to see that European HNWI are equally diversified in real estate, equities and cash (+/- 23%)
Cash is the most important position for HNWI globally. Even in an environment of low level of interest rates
The regions where real estate is identified as the most important asset class are Latin America & Middle East and Africa which represents the logic of Maslow's theory "property symbol of security".
That general picture offers a first answer, but with the bias that those statistics are linked to people that have a potential of investment above 1 MM USD.
Assumption: "Real Estate is very stable and is constantly growing!"
This sentence was the answer provided by some participants to that conference. So do you think that really? Do you remember 2007 and the subprime crisis in the US? Yes I know it's far away from most of my European followers. Then, do you remember the consequences of the subprime crisis in Spain or Ireland...?
The following table shows the real estate price evolution since 1996 (constant price -inflation included).
Yes it's maybe a surprise for you, as it was for me, to discover this but there is also volatility in real estate! Belgian people say about themselves that "they have a stone in their stomach" (nous avons une brique dans le ventre) which means that they invest a lot of money in their property due to many factors like a low level of pension (so they invest in real estate for the future) or like the "bonus logement" (some tax cut for property owners) but they forget that sometimes prices can be volatile and it's good and necessary to diversify the portfolio.
Another interesting point:
When we buy real estate, that investment is often financed through a...mortgage. Which is a long term debt! So have a look on this, which is a graph representing housing vs mortgage rate in the US.
For people that are still convinced that real estate is not impacted by the economy and is the best investment ever, don't forget that the price is also correlated to a mortgage rate (lower rate = higher price and higher rate = lower price).
I don't go into the details regarding some disavantadges about real estate but : what about tenants that doesn't pay their rent, home improvements, taxes, time you take to manage the general costs etc.
But there are alternatives to bypass those disavantadges by investing in real estate via some stocks. Your private banker will probably help you to select real estate quoted companies with the highest long term potential.
To be wise, yes it's interesting to have real estate as one of the instrument of diversification but definitely don't invest all your assets in this long term and sometimes costly investment.
High Net Worth individuals are probably the best advisors in order to know how which is the best balance between cash, bonds, equity and real estate.
HNWI research by Cap Gemini and RBC Wealth Management: https://www.worldwealthreport.com/