Property or shares?
Written on the 17 April 2009
With similar returns for shares and property in the current market, the investor’s timing, preference and cash flow will dictate choices in the long-term. But despite the level playing field, there are key variables that need to be assessed.
AUSTRALIAN shares have surpassed unlisted property over the past 20 years, yielding an average of 8.6 per cent and 10.7 per cent each year respectively, compared to property average annual returns of 7.5 per cent and 9.9 per cent.
Over the last decade, unlisted property beat shares with respective average annual returns of 12.7 per cent and 11.7 per cent, compared to 6 and 6.2 per cent.
Property is less volatile but it’s much more expensive to accumulate a solid portfolio. Diversification is harder to achieve in property. You need a lot more money to have a range of properties in the portfolio. By contrast, an investor can put together a decent share portfolio with considerably less.
According to Napier & Blakely director Alastair Walker, the one commonality is that opportunities are prevalent in the current market.
“Historical lows create good opportunities across the board but no matter what asset class you invest in, there will be a two to three year minimum window,” says Walker.
“It’s all very speculative at the moment, but in property, the volume of bad assets creates a catalyst for stability from cashed up foreign investors. The realisation of the vendor market is crucial. Where is the bottom of the value pit? There’s so much property for sale, it’s going to affect yields. People have their wallets open, but they’re not taking out the money.”
With cash flow, shares are considered more attractive because of the tax benefits of franking in Australia. A lot of the ASX 200 companies frank their dividends which mean the companies pay tax at the 30 per cent rate and then pass it on.
“There are tiers of wealthy private investors that have made a lot of money in the stock market during downturns. If you have the cash, now is the time. The share market in some areas will bounce back,” says Walker.
US investor and billionaire Warren Buffet once advised: “The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.”
Walker says that property is a viable option for the more cautious investor given the volatility in the capital markets. With property, even if the valuation fluctuates, rent will generally stay the same, so in 10 years the investment could double. Income stream is another important consideration and property is more of a growth asset than a pure income asset.
“There is a lot of distress across the board and if you’re debt driven it changes the way you look at property,” he says.
“The banks don’t want to become the major property owners in Australia. If the banks inherit a lot of property, they don’t really have the know how to manage it.”
Walker says some properties that had a 6 per cent yield two years ago are now forced to sell at around 9 per cent. Yet opportunities abound for the savvy investor.
“Avoid large scale industrial product, be patient and remember that returns are not expected for up to three years. It’s important to plan for the upturn, project managers should be scheming right now,” he says.