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September 10, 2020

Property Investing vs Other Asset Classes: A Comparison

What makes property investment a superior choice to alternative asset classes? Rory van den Berg discusses.

A perennial question: should I invest in property or stocks, or bonds or…..? It’s a question every investor asks themselves at some stage or another.

Nowadays, there are seemingly endless choices about where to invest your money. Invest in residential or commercial property? Stocks, shares or bonds? Even digital or cryptocurrencies… or maybe just plain old cash?

Yet, at the end of the day, most investors come back to the basic choice between investing in property or in stocks/shares. 

After all, not everyone is yet comfortable with investing in government or institutional bonds or buying cryptocurrency, and not everyone is brave enough to trade foreign currencies.

Property investment is a major wealth creator

In reality, over time, few investments have created as much wealth as investing in property. Prudent property investment in, say, London, Manchester, Glasgow or Birmingham or other major UK cities have provided a true constant across the history of investing and wealth building.

Stocks and shares can also offer some excellent opportunities. If you are nimble and knowledgeable enough, that is. Values of stocks can change quickly, and you must be prepared to ride out the difficult times when one of the so-called “Black Swan” events occur, and they plummet in value. These events may be a financial crisis, political upheaval or, as more recently, a global pandemic.

We all want to get the best returns

Obviously, one of the key objectives of any investment is to maximise profits whilst minimising risks. Within the property sector, there are different types of assets (properties) which offer different returns or yields. These may be residential properties, offices, hotels or even warehouse/logistics premises. Each asset class has unique characteristics and offers different yields or investment returns.

The same is true for stocks where some types of shares can be considered high-risk investments (say, tech stocks). Other stocks offer more stability in their prices and are acquired mainly for their dividends (say, shares in electricity or other utility companies).

Investing in property vs buying stocks

Any prudent investor needs an investment strategy that fits both budget and investment objectives.

It’s, therefore, useful to compare some of the pros and cons of an investment in property with buying and selling stocks and shares:

Tangible assets: Property assets are real. They can be touched, felt and even lived in if necessary! All types of property are, after all, immovable assets with inherent, intrinsic value.

On the other hand, stocks are essentially only paper (or electronic copies), traded every day and worth only what the stock market values them at a given point in time;

Investment returns: Investors in property expect to receive rental returns from their investment on a monthly or annual basis. The rental received and, therefore, investment returns depend on the covenants and security of the occupier, and market rentals or values.

Property assets also offer the prospect of long-term capital appreciation. Generally, long-term investment in property has been an excellent hedge against inflation.

Of course, stocks offer returns in the form of dividends, but these depend on the business performance of the company in which an investor owns shares. On the other hand, short-term traders don’t wait for dividends and are simply looking for an increase in share prices to achieve their returns;

Liquidity: By their very nature, properties generally take longer to buy or sell than stocks. Extensive due diligence needs to be undertaken, formal sale and purchase agreements signed, deposits paid and so on. But the relative illiquidity of property assets is also a plus as it deters short-term decision making which may prove to be disadvantageous over the longer-term.

Stocks do offer greater liquidity as they can be sold or bought almost instantly. However, sometimes the window for taking profit is tiny. And sometimes share prices move so quickly that losses can accumulate rapidly;

Availability of debt or funding: Buying property invariably needs financing, and there is a vast array of entities prepared to finance property investments. It may be that a single entity (bank or mortgage provider) funds the debt. Alternatively, the funding may be syndicated amongst several parties. Such funding helps leverage an investor’s equity—and, hence, returns.

The purchase of stocks can also be funded too, with many equity brokerages providing leverage or margin trading facilities. However, in a volatile stock market, it’s easy to see large decreases in the value of the funds invested with drops in share values magnified as prices drop. 

Investment options: It’s possible to invest in property either via direct purchase or indirectly where you don’t own or have full control of the asset. Direct purchases invariably involve a higher up-front cost, but you are then the decision-maker and primary beneficiary of any investment returns. Indirect property investments can be made through property investment trusts (REITs) or commercial property bonds, for example.

Similarly, many smaller investors acquire stocks by purchasing “units” regularly in specialised funds which will invest in shares and specific stock markets recommended by their fund managers. There is usually an entry fee to make such investments and then ongoing management or annual fees.

Investment risks: Property markets are driven by the supply and demand for homes, apartments or office space, as well as the overall health of the domestic economy (and, to some extent, the world economy). Yet, as land is limited in supply and property planning and development takes time, short-term risks may not always impact the value of and return associated with property.

On the other hand, the stock market is subject to various different kinds of risk: market risk, economic risk, as well as inflationary risk. As a result, stock prices can be extremely volatile.

Such volatility may be the result of macro related issues (i.e. geopolitical). But it can also be the result of company-specific events, which can be considered micro (i.e. a sudden drop in profits). Then there are the regulations, tax revisions, or even changes in interest rates set by a country’s central bank which can all impact stock prices.

Decision, decisions

Only you and you alone know your primary investment objectives and risk tolerance. Yet, investment in property has time and time again proven to be a wealth creator. So, if you are looking for a solid-long term investment, it’s hard to bet against investing in a property in one of the UK’s major cities

If you would like to learn more about exciting investment opportunities in the UK market,
Contact us here
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Article by: Rory van den Berg