RESIDENTIAL real estate outperformed all other asset classes on a risk-adjusted basis over the past two decades, according to a new landmark report.
The report by NERA Economic Consulting and Mercer found that residential property performed better than Australian shares, 10-year bonds and listed property trusts.
Released yesterday, the report said that between 1982 and 2005 capital and total returns from residential real estate averaged 8.3 per cent and 14.8 per cent a year, respectively.
While these returns were not as high as those for Australian shares, on a risk-adjusted basis, residential property was the better performer. The report ranked risk-adjusted returns of each asset class using so-called "Sharpe ratios", calculated when asset returns are divided by asset return volatility. The report found residential property had a Sharpe ratio of 1.96, higher than Australian equities (0.79), listed property trusts (1.14) and 10-year bonds (1.33). Only the inherently low-risk bank bills had a higher Sharpe ratio, 3.99.
"Residential real estate has about the same return as the All Ordinaries," the report's author, NERA Economic Consulting associate director Tom Hird, said.
"But, because it has less than half the volatility, it has a Sharpe ratio that is more than double that for the All Ordinaries."
Mr Hird said the return from residential property over the past 23 years was sustainable.
"The best predictor of what will happen in the next 20 years is the performance of the past 20 years," he said.
The report found that residential real estate was the world's largest investable asset class. "In Australia alone it represents some $2.8 trillion worth of assets and is the nation's largest investment category."
Despite residential property's strong performance, the report noted there had been only limited opportunities for institutional investment.
The report was commissioned by Rismark International, a global real estate funds management group, believed to be exploring the possibility of bringing a residential product to the institutional market.
Rismark's executive director of capital markets Glen Bertram said the findings suggested that residential property should feature in the portfolios of all serious investors.
