Investing Property Shares

Investing Facts: Shares vs Property

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Investment is the process of devoting time, energy, or resources in the hope of future benefits.

From a personal finance perspective to invest is to allocate stored energy, in the form of money, toward creating or buying an asset that will provide a return via capital gains, dividends, interests, rents or a combination thereof. A good investment will return more back to you than you invested in the first place.

Wealth Goal = Invest X and get X+ back

commission-free-mortgage

Investing Choices

In the simplest terms, only two asset classes are worth considering when it comes to investing. These asset classes have been responsible for building the greatest fortunes in history. The investment options are:

  • Businesses (shares)
  • Property

Businesses are a representation of creative energy in action. Like Apple, they change the world with their products and services, like BHP they create economic growth through long term projects and like all companies large and small, they provide jobs. Businesses are the engine of the economy.

Property is a store of creative energy. In the building phase property creates employment (carpenters, plumbers, builders), but in the long term it is not responsible for much economic growth (i.e. your house does not employ anyone). We are certainly moving into an interesting phase where some of the largest companies in the world, think Air bnb and Uber, don’t own any property at all. Nevertheless we all need some place to live and work and while this remains the case, property will remain a desirable asset.

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Property vs Shares

Enter the age old battle of the asset classes: property versus shares. Who will be the undisputed heavy weight champion of the investing world? Despite what some other experts would suggest, the answer is not exclusive. A good investor will always have a combination of shares and property. Even the global representative for share investment, Warren Buffett, will consider direct property as an investment class if the price is right (after all it is just another investment).

Berkshire-Extract

Read more at: Page 17 of the 2013 Berkshire Annual Report

Diversified Portfolio

The principle of diversification suggests that you should have an exposure to all asset classes because they will perform differently at different points in the economic cycle. For example in any given year, one asset class may go up, with another may go down. If you have the right mix of investments in your portfolio, you should be able to make a positive return in almost all markets.

Take a look at the historical performance of all the listed investment classes from Real Estate Investment Trusts (AREIT’s) through to Cash. Residential property is not featured on this chart, because it is not a listed investment (one that you can buy on the stock exchange).

  • When viewed from the businesses / property dynamic, infrastructure could be considered a property like investment.
  • Fixed interest and cash are defensive investments and are not expected to provide capital growth.

Diversification

 

Read more at Business Insider HERE

I can hear you telling me, that is an interesting chart but what about residential property. Read on.

A recent report released by Russell Investments and the Australian Stock Exchange (ASX) tackles this question, comparing different types of assets to discover what will bring the best returns to Australian investors. What ’s more, they have included residential property in this analysis.

You can access the report here: Russell Investments/ASX Long-term Investing Report 2015

The Dollars and Cents

When it comes to investing we want to remove all the conjecture, emotion and misinformation and just look at what really matters: the dollars and cents (a very wealth guy way of saying the facts). The Russell Report is powerful because it compares each of the asset classes over the last 20 years, the results of which we have extracted below.

Asset-Class-20-Year

 

As you can see, it has been a very close race between property and shares. Property has returned a slightly higher gross return, or before tax return, at 9.8% p.a., however when factoring in for taxation, Australian shares have been the best performer.

Put simply, Australian shares are a more tax effective investment because they pay dividends with tax credits attached. You can read more about these tax credits HERE

The Elephant in the Room: Gearing

Why do so many people feel that property is the only road to riches and that investing in shares is akin to gambling? In my experience there are a couple of factors:

  1. People fear shares because they don’t have the knowledge to invest successfully and let’s face it share prices seem to jump around indiscriminately every day. Common saying: “bricks and mortar is safer because I can see what I own”.
  1. Banks will lend you more money to invest in property than shares, giving a false sense of security. When it comes to investment assets what goes up, can just as easily come down, just look at the Irish property market in the GFC.

The elephant in the room, is using borrowed money to purchase these assets. There is no doubting that it is far easier to borrow money to buy property and you have no chance of margin calls (having to top up your loan if your shares fall in value).

The Russell Report has also done this comparison. As it turns out, when using borrowed funds, the outcome is, once again, very similar:

Asset-Class-20-Year-Gearing

 

All things being equal we would prefer to use borrowed funds to invest in property as opposed to shares, because margin loans are more expensive (interest rates are higher) and you are subject to margin calls (if your share portfolio drops enough in value, even for one day, you will need to reduce the loan with new cash or sell your shares).

The ASX share ownership study for 2015 is out!

– 36% of the Australian adult population own shares
– This figure has…

Posted by The Wealth Guy on Sunday, August 2, 2015

Shares vs Property: The Pros and Cons

We believe a good investment portfolio will have a combination of shares and property. Having worked very closely with hundreds of clients who have invested in both asset classes we provide a quick and dirty pros and cons comparison:

Property Pros

  • You can make meaningful changes to your asset to improve its value (think renovations etc)
  • You can borrow more from the bank (good if the investment goes up in value, very bad if it goes down)
  • You can directly administer the asset (rent the property, collect the rent, maintain the building etc)

Property Cons

  • You have no diversification (one property in one suburb in one city, means all your eggs are in one basket)
  • You have tenancy risk (anyone who has ever had a bad tenant will tell you this is a nightmare)
  • Your investment is not liquid, it takes time to buy and sell
  • You will usually have a higher level of borrowing attached to property (bad if your property goes down in value).
  • You have higher costs (think commissions, rates, strata levies, insurance etc).

Share Pros

  • You own a share of a big business run by professional managers
  • You can easily buy and sell on the market for a low cost
  • You may get tax credits for dividends

Share Cons

  • Shares are valued every day, minute by minute, so the share price can be volatile (the price of liquidity is volatility).
  • You have no influence over the day to day operations of the business

Summary

  • There are only two growth investments: businesses (shares) and property
  • A good portfolio will have investments in a range of assets
  • Australian shares have provided the best after tax return over the last 20 years
  • Residential property has provided the best before tax return over the last 20 years

 

A Snapshot of The Russell Investments/ASX Long-term Investing Report 2015

Here we take a look at some of the most important outcomes to come out of that report, and what they mean for you.

International assets are overtaking Australian shares and property

The report found that over the past 20 years, Australian residential property and shares have provided the highest returns to Australian investors, followed by unhedged* international property, shares, and fixed income. However, a different story has started to emerge over the past 10 years, with hedged* international shares and hedged international fixed income overtaking Australian shares and property.

Why have Australian assets been delivering poorer returns?

The decline in returns on Australian assets reflects a suffering Australian economy. Since 2013, interest rates have sunk to historic lows and the Australian dollar has been suffering, and as a result the gap between returns on Australian assets and international assets continues to widen. The Australian economy depends a lot on the success of the four major banks and its exports, and with bank stocks behaving unpredictably and China’s demand for our iron ore on the decline, the Australian dollar is expected to get weaker and weaker as time goes on. In addition, the US is expected to increase its interest rates in the near future, which is likely to strengthen the US dollar but consequently drive the value of the Australian dollar down even further.

Spotlight on property

Overall, Australian residential property investments have provided strong returns in the recent past. In 2014, Australian median property prices rose by just under 7%, fuelled by decreasing interest rates. But if we break this down by state, we see:

  • A massive 15% increase in Sydney
  • Increases of around 4% in Melbourne, Brisbane, and Adelaide
  • Only a 1% increase in Perth

This huge variation means that just because median property prices are increasing doesn’t mean the price of any given property is necessarily increasing. Furthermore, the seemingly endless increases in property values have fuelled speculation that Sydney and Melbourne may be in a ‘property bubble’ – and that bubble could burst at any point, sending property prices into a tailspin. Even if that doesn’t happen, shares still appear to be the more favourable option with both international (hedged) and Australian shares yielding higher returns than Australian property after tax over the past 10 years.

*Hedging reduces the impact of variations in the value of the Australian dollar on international assets, usually with forward foreign exchange contracts that allow exchange of currencies at a set exchange rate at a specific time in the future.

You can access the report here: Russell Investments/ASX Long-term Investing Report 2015

 

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Joshua Stega

The Wealth Guy

Joshua Stega is an expert financial adviser and founder of JAS Wealth in Sydney. He specialises in the habits and behaviours of wealth. Joshua has a Masters in Taxation and Financial Planning and is regularly featured in the media

M.TaxFP, LLB(Hons), B.Bus(Acc), FTI, Adv.DipFP, Dip.FP, SMSF Specialist
The information on this blog and website is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision. We recommend you consult a licensed financial adviser in order to assist you.
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