Property vs shares

By

09/09/2011


Q:I’m looking at investing in property at the moment, but the share performance is also enticing me to put my money in that asset class. At this stage of the cycle, is it better to put my money on shares or property? I already own some shares but I don’t have investment property. Any advice on how I can get started with property investing? 

A:This debate has been argued on both sides for years, and will continue to be discussed for years to come. Property spectators argue that property is the way to go, while financial planners and share market enthusiasts generally argue shares and managed funds are the trail to the Holy Grail.

What is agreed on, however, is that whichever path you choose, diversification is the key to developing a safer, and most likely, better performing portfolio. Share market enthusiasts recommend investing in different shares from many sectors to diversify your share portfolio, while property gurus preach about buying property in different states and different price ranges to diversify.

I would agree with both, but to choose one over the other is not generally a recommended solution for anyone. The goal for most should be to build a well balanced and well diversified investment portfolio, which invests across many asset classes.

The first step in deciding the composition of your portfolio will be to consider the timeframe you wish to hold your investments for, what return you wish to receive and how much risk you are willing to take on.

Shares and property are very different investments, with extremely different features, particularly in terms of growth, tax implications, volatility, liquidity and  leverage, and it is these factors that stop me from speculating exactly what is best for any one person. This depends wholly on the investor’s personal circumstances, constraints and views/goals of income.

Since you already have shares, I would recommend adding residential property for a couple of reasons. First, it will achieve more diversification in your portfolio. Second, that residential property (done well) is a very powerful wealth creation tool. I firmly believe that residential property has a place in a balanced investment portfolio, and below is the rationale for this:

  • Historical pattern of steady growth (prices doubling on average every 7–10 years)
  • Displays less volatility than shares or similar investments due to approximately 70% of the housing market being owner-occupied (ie, homeowners are less likely to sell their homes during times of financial turmoil. Conversely, shares, due to their great liquidity, can be quickly and easily divested – and frequently are – often resulting in reduced share prices and volatile investments)
  • Historically, shares can fluctuate by 30–40% in any one year, offering the investor a pretty bumpy ride at best, and at worst very little clarity or comfort in the value of their investment portfolio
  • Unlike shares, a property is unique, meaning there’s less competition. When you purchase shares on the stock market, you must buy at the market price at that particular time, whereas a property may be bought below market price through strong negotiation. To an emotional or uninformed seller, often price is secondary to other terms, such as time or access to deposit funds, allowing you to buy below market price
  • Property allows the investor more control, through the ability to add value (eg, renovate or redevelop) and the choice of how your property is utilised (tenanted, vacant or personally occupied) – shares are controlled by the company’s management team and their performance, not by you!

For me, the most compelling argument for property over shares is that banks will lend generally 80% to investors in property, sometimes up to 90% or 95% of the investment. This means that people can increase their return on investment due to the leverage factor. This can also be achieved with share investing using margin loans (where the shares provide security for the loan), but generally only at 60%, so on a same percentage returns basis, property will return more as it has more leverage. The risk to be noted with shares is that margin loans have ‘margin calls’. This occurs when the share price falls below a level where it no longer provides adequate security for the loan and the LVR becomes higher than the maximum allowed. Unless the investor can make the extra repayment in cash, they will be forced to sell all or part of their investment. To avoid this would be to not to have margin loans, but this would be the most unleveraged option.

The fact that banks (which are conservative by nature) allow higher LVRs with property investing should be comforting to an investor, because if the bank is willing to do this, what does this say about the bank’s thoughts on property value and risk?

If you only have a small amount of equity or cash to put in and you are considering shares for this reason, perhaps you could consider investing in property through a retail investment trust (where you share ownership in the property with others by buying units in the trust). Such ‘residential funds’ can be found on Morningstar in the ‘unlisted/direct property’ category. This can provide a relatively new and effective alternative to access residential property as an investment for as little as a $10,000 investment.

Remember, though, each individual investor has a different set of needs and is looking for different outcomes, so it is always best to seek independent advice from a financial planner or similar, in order to discuss the best plan for your particular circumstances.

 

– Pino Tedesco
Pino is a director at Capital Property Advisory, a qualified valuer, and has a solid background in property acquisition, due diligence and valuation.

 

 

If you have a question for our experts, email it to: editor@yipmag.com.au

 

 

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