Investing in real estate vs bills, bonds
Allan Atwiine
There is always intense debate about whether to invest in treasury securities or real estate, particularly because both hold the promise for capital preservation with a guaranteed income stream.
Treasury bills and bonds are investments in government debt securities whose rate of return is in the form of interest. Treasury bills are short-term while treasury bonds are long-term. Both are exhibited as risk-free because of faith that the government must pay. In this article, I will refer to them as TBs.
While making comparisons between real estate and TBs, the latter is usually discussed in a broad view hence biasing facts.
In one article I read, TBs were compared with what would-be income; if someone rented their home yet a home is not held primarily for income generation, making it baseless to relate it with TBs when deliberating on asset classes. For a proper and fit appraisal, TBs should be measured against real estate that is established to generate cash-flows.
One should bear in mind the fact that real estate is idiosyncratic in nature (rental yields for similar properties within the same location differ) and this further complicates any attempts to accurately compare the two.
More so, Person A and Person B may be given two adjacent plots of the same size, all with instructions to build rentals but if their construction knowledge differs, one will spend more money or build what yields more than the other, which will affect each one’s return on investment.
To protect the reputation of treasury bills and bonds as risk-free assets, the central bank meets its TB payment obligations reliably. Still, I am compelled to explore whether they are as risk-free as claimed. There are countries that have failed to honour bond payments such as Lebanon ($1.2billion) in March 2020 and Argentina ($500 million) in May 2020.
In 2013, the US Treasury Secretary Jack Lew pleaded with the Congress to increase its borrowing limit so that the state doesn’t default on its financial obligations, one of which was payment to government bondholders. In 1932, the United Kingdom reduced the bond’s coupon from 5 per cent to 3.5 per cent.
On January 6, Bank of Uganda (BoU)approached some investors whose bonds (with an 11 per cent yield) were meant to mature on January 21 and requested that they convert them to mature later. The incentive was that the converted bond would yield 16 per cent or 17.8 per cent, depending on the investor’s preferred new tenure. This means that BoU was constrained to pay out the TBs (Shs1.024b) which were about to mature.
Although it’s in the best interest of the government to pay for fear of the severe negative impact on the economy, if it didn’t; TBs are contractually silent about what would happen if there was delayed or non-payment.
But one wonders what the fate of TB investments would be, in the face of prolonged catastrophic events, such as drought, war, or other fiscal risks, which may be lightly considered now but would result in extraordinary stresses on public finances, if they became reality. What would happen if a regime change happened unconstitutionally and the new government considers such treasury obligations as odious debts?
To compare the two asset classes with precision requires a rate of return (income, capital gains) computation for at least a 20 year period, which is hard because of data deficit, but even then, past metrics may not help one to correctly forecast future returns. Only through a prudent fiduciary approach can the artificial signals or triggers be screened out.
TBs do not need a huge cash outlay to get started, are highly liquid, and do not require expertise to invest in. On the other hand, real estate offers capital appreciation, a better hedge against inflation, and better tax benefits. The efficient strategy to grow wealth is ideally a diversified portfolio. Investment in either should be weighed against their merits and demerits, within the context of the investor’s unique circumstances.
Allan Atwiine writer is a lawyer.
