Thought of the Week

How has real estate performed relative to other asset classes during the downturn?

March 28, 2024 3 Minute Read

By Jen Siebrits Steven Devaney

How has real estate performed relative to other asset classes during the downturn

The last two years have been challenging for commercial real estate investors. Values of many real estate investments in the UK have declined; the CBRE UK Monthly Index shows values have fallen by over 20% since June 2022. There has also been a sharp drop in transaction activity while leveraged investors were faced with higher interest rates.

Yet real estate isn’t the only asset class to have suffered. Over the past year, UK equities and government bonds have produced returns below their long-term averages and have failed to match the inflation rate over the same period. And although UK real estate hasn’t matched the 3.4% (CPI) inflation rate either, it has outperformed equities and bonds.

Looking back over the last five years, UK equities have outperformed real estate, but investors in gilts have seen negative returns on an annualised basis owing to the negative impact that increase in interest rates have had on bond prices. However, this dampened capital flows to real estate last year from multi-asset investors as they sought to rebalance portfolios towards target allocations for fixed income investments.

Still, despite the impact of the current downturn, returns from UK real estate remain competitive over longer time horizons. Real estate has outperformed UK equities (and inflation) over a 10 year horizon as well as providing a respectable level of return relative to equities and gilts over the past 20 years – a period that also spans the Global Financial Crisis.

These statistics illustrate why UK real estate continues to appeal to a broad range of investors, especially those that can look through the cycle and invest for longer term benefits.

Figure 1: Total returns for investments into different UK asset classes (%)

Sources: CBRE Research, FTSE, Macrobond


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