Total return of listed residential real estate outperforms direct over ten years

Quentin Depreter

After studying Business Engineering at the Louvain School of Management (Belgium), Quentin Depreter quickly moved into retail real estate. After working for H&M and Carrefour, he recently became Real Estate & Expansion Manager BE-LU-FR for Di Beauty and April/Planet Parfum (Bogart Group). Wishing to diversify his knowledge in real estate, he undertook an Executive Master in Real Estate (University of Saint Louis, Belgium). It is in this context that he wrote a thesis, the conclusions of which are presented here.

Among Belgian individual investors, physical real estate (mainly residential) has always seemed to be popular. The fall in interest rates has only accentuated this phenomenon: they are indeed investing more and more in ‘bricks and mortar’. Is this type of investor too quick to trust in physical real estate investment? Are they aware of the alternatives in the residential asset class, or is their choice only guided by inertia or a slight lack of awareness?
We wanted to check whether the basis for this choice – which sometimes seems to be ‘by default’ – is based more on rationality or emotion. In short, is the strong preference for physical residential real estate justified in terms of both 1) its characteristics, advantages and disadvantages, and 2) its total net returns on investment when compared to an investment in REIT shares?
Regarding the first question, physical real estate certainly has significant advantages: frequency of income, low volatility (or rather hidden volatility), the benefit of debt leverage and the associated tax advantages. However, an overview allows us to state that an investment in listed real estate (more precisely in REIT shares) is generally more advantageous, for example, in terms of entry (initial investment) and exit (liquidity) barriers, diversification, the guarantee of constant income, operational management, taxation, transparency of information and transfer of assets (especially in the case of a donation).
We can derive the answer to the second question from a concrete case study modelling two types of residential real estate investments.
On the one hand, we considered an average flat in a typical Brussels municipality at the end of 2000 acquired to be rented out over a given period (either twenty years or ten years). The model made numerous fact-based assumptions: acquisition and selling price, bank loan, acquisition costs, necessary works, maintenance and repairs, rental parameters (turnover rate and rental vacancy, management, and rental costs), annual costs (insurance, rental charges, property tax), history-based rent modelling, tax advantage, etc.
On the other hand, we considered the acquisition of a number of residential REIT shares equivalent to our investor’s available savings. Several portfolios were composed, including an exclusively Belgian portfolio (Home Invest Belgium as investment proxy) and portfolios of European residential REITs.
Looking at the results, the total return of an investment in a basket of listed residential real estate is far more attractive than physical property investment over a period of ten years (22.4% versus 4.2%). In addition, taking Home Invest Belgium as a reference, we see overperformance both in a ten- as well as 20-year time span (9.7% versus 4.2% and 7.7%, respectively).
It is only in the case of a 20-year investment (2001 -2020) that an average Brussels flat seems to offer a better return than the European portfolio over the same period. This outcome is primarily due to the significant capital gain realized on a flat held over these 20 years and the limited sample of two REITs available over this period.