Rents would have to grow by four percentage points above inflation every year for residential property to beat the returns available on the stock market, according to a new analysis from NCB.
The broker has also concluded that historical rental yields do not support the notion that capital appreciation in property will come in ahead of inflation over the longer term. NCB argues that for capital appreciation to be higher than inflation it needs to be supported by "sustained and consistent" growth in net rental income ahead of inflation.
"To date, the history of growth in Irish residential rents does not support this outcome," NCB concludes, having analysed Central Statistics Office rental data for the past 15 years.
The latest research was born out of an analysis conducted by NCB earlier this year which found that wealthier clients were investing more in residential property than in any other asset class.
This conclusion prompted the broker to work out how the investment case for Irish residential property, as opposed to other investment classes, can best be quantified. In this light, it has arrived at a "price/earnings" (p/e) multiple for houses and apartments based on the purchase price and the earnings available at the time of entry.
P/e multiples are typically used by investors to establish what kind of value a stock offers.
The ratio is calculated by dividing a firm's market capitalisation by its after-tax earnings over a year. It essentially offers a way of judging how much the market is prepared to pay to tap into a given company's profits.
NCB reckons that Irish residential property is currently trading on a p/e multiple of 38.9 times, while a diversified portfolio of Irish stocks has a p/e of 13.6 times. Government bonds - arguably the safest investment option available - are given a p/e multiple of 54.1 times.
NCB contends that for a higher p/e multiple to be justified, the investment option would need to offer better future earnings growth than equities and/or lower risk. This is not necessarily the case with the differential between property and equities, the broker suggests.
NCB reckons that the risk attached to property investment will, in general, be about the same as the risk priced into equities.
Moving on to examine earnings growth, the broker concludes that rents would need to grow by 4.08 per cent above inflation for the long term to beat returns on equities. This is based on equities delivering a real return of 6.65 per cent each year and rental yields coming in at about 2.6 per cent.
On this basis NCB, which generates much of its revenue from selling equities, judges that the p/e multiple on property "continues to explore new and unprecedented highs".
