By: Jon Stojan
Financial analysts use the S&P 500 as a reference point for equities when comparing investment returns. The index is a metric of long-term performance in the stock market, used in research studies, textbooks, and media commentary. However, some experts argue that these comparisons fall short when evaluating real estate.
Adam Gant, a Victoria-based investor with experience in housing and capital markets, notes a structural pricing mismatch between the two asset classes. “The S&P 500 is made up of companies that are, on average, 61 percent leveraged,” he says. “Whereas in real estate, they usually use an unleveraged property. That’s not how anyone in the real world invests in real estate.”
This difference can skew the perceived risk and return that investors believe they need to bear. Mortgage financing is a standard part of real estate investing. However, in many academic and institutional models, real estate is modeled as purchased outright, unleveraged. Public companies, however, are priced and judged on a fully intact basis, including all their financial structures, as well as their debt.
“If you look at real estate on a like-for-like basis with the same leverage profile as companies in the S&P, the performance works out differently. Depending on the market and the structure, real estate may provide superior returns with less risk over long periods,” says Gant.
This suggests that there may be a need to reconsider some long-standing assumptions in financial education and investment guidance. Investors comparing options might not always be aware that they are working with two different sets of underlying assumptions. As a result, they could overlook opportunities that better align with their goals, particularly in environments where equity markets are experiencing volatility or are perceived as overvalued.
The discussion about investment models is evolving, particularly in Victoria, where concerns about housing affordability and market access are frequent. Gant notes that many young investors actively seek alternative entry points into real estate, through joint ventures and new funding platforms, rather than relying solely on traditional ownership.
In some respects, real estate faces unique challenges within this sector, including liquidity constraints, regulatory considerations, and property-level management. There are other variables that equity investors cannot control. According to Gant, real estate owners are generally the determinants of a property’s performance. “Owners have the option to renovate, reposition, push rents, or cut expenses. That level of control doesn’t apply to shares in a company,” he says.
Despite numerous positive performance metrics, the narrative surrounding real estate as an alternative investment typically downplays its accessibility and adaptability. Newer ownership structures, such as shared equity and co-investment platforms, are starting to remove entry barriers. While these models remain works in progress, they indicate an interest on the part of some investors in more diversified forms of asset ownership.
Individual investors often rely on oversimplified comparisons when deciding where to invest their savings. When one asset class appears to outperform another based on incorrect assumptions, it can lead to a long-term misallocation of resources. That being said, stocks and real estate differ significantly in terms of their structure. Stocks offer flexibility, scalability, and low transaction costs. Real estate is more location-bound, requires active management, and moves at a slower pace. Both have risks and benefits, and neither asset class is necessarily more beneficial than the other.
However, when it comes to modeling returns, Gant argues that the financial industry should consider how leverage affects various outcomes. “This is not a new issue, just one that’s not been properly addressed,” he says. By applying a uniform framework to equities and real estate, analysts and investors can gain a more realistic understanding of how each asset class operates and how they fit into a long-term strategy.
Disclaimer: The views expressed in this article are those of Adam Gant and are provided for informational purposes only. The comparison of real estate and equities as investment classes is complex and depends on individual circumstances, risk tolerance, and market conditions. No financial advice or recommendations are intended. Readers should conduct their own research or consult a financial advisor before making investment decisions. Past performance is not indicative of future results, and all investments carry inherent risks.
Published by Joseph T.
