Author Topic: Real estate vs stocks P/E multiples  (Read 280 times)

mucstache

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Real estate vs stocks P/E multiples
« on: August 17, 2020, 12:39:46 AM »
Hi all,

Does it make sense to compare real estate and stocks based on their multiples (rent for RE, earnings for stocks)?
Is it structurally wrong to do so?

Background of this question:
I'm based in Munich, Germany. Rental multiples here are around 42 currently, i.e. purchase prices equal 42 times annual rent (excl. utilities). According to some studies (UBS), this market is currently the most overvalued / at risk of a bubble market in the world, coming in even before Canada.

I wonder why people buy here instead of just investing in index funds - Vanguard world trades at 20-21 P/E, is better diversified, comes with very low transaction cost, has no ongoing depreciation (earnings are net yields, no additional maintenance etc required).

Is it wrong to even compare P/E across stocks and real estate?
Do you compare these two when deciding on stocks vs RE investments?

vand

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Re: Real estate vs stocks P/E multiples
« Reply #1 on: August 17, 2020, 05:13:25 AM »
They not similar at all, and I think its dangerous to compare one with another.

If you're buying stocks via an index fund as most people here do then you get the benefits of indexing, whereas with a rental house you are not buying the whole market.

People say that it's easier to employ leverage with real estate, but what they don't realise is that stocks already have built in leverage because nearly all companies issue corporate bonds to fund themselves.


mucstache

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Re: Real estate vs stocks P/E multiples
« Reply #2 on: August 17, 2020, 05:23:53 AM »
Thanks. To clarify, my point is that RE should have LOWER multiples vs a diversified index fund to reflect the increased concentration risk, illiquidity, maintenance and other fees, etc.

CarlosMontegro

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Re: Real estate vs stocks P/E multiples
« Reply #3 on: August 17, 2020, 05:48:32 AM »
You mentioned once rent being equivalent to earnings, and another time rent ex utilities being equivalent to earnings.  I don’t think that’s accurate.  Rent should be equivalent to revenue or sales, and rent - non mortgage expenses is probably roughly EBITDA.

I think there is merit in comparing the two.  I mean, investors often need to make the decision “stocks or real estate?”  How do you do that without comparison?  But just comparing the multiples is probably misleading.

I imagine that prices being so high compared to rents in Germany, that real estate investors are just hoping for capital preservation, or there are some other big advantages, e.g. taxes, at play here

mucstache

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Re: Real estate vs stocks P/E multiples
« Reply #4 on: August 17, 2020, 06:15:25 AM »
Comparing to sales would be even more stark - S&P500 is between 2-3x annual sales.

Here in Germany, owning RE does not have material advantages vs stocks in my view, except perhaps tax free sale if held >10 years. This is offset however by paying your personal marginal tax rate on RE income, vs lower taxes on stock income (since corporates also pay taxes already).