The great investment debate: property or shares?

Matrix Planning Solutions' Rick Di Cristoforo examines the pros and cons of the age-old investment debate: property or shares?

From boardrooms to backyard barbecues, if you haven’t been asked the question yourself, no doubt you have heard it asked at some point: “So what’s a better investment, property or shares?”

I recently took part in a debate on this exact topic, and today would like to revisit one of the biggest questions in the investment world: should you put your money in residential investment property or shares?

In the blue corner we have property: many people’s first choice, and the basis of many investment portfolios. In the red corner are shares: a strong competitor in terms of growth and income, but often misunderstood. Let the debate begin.

Affordability

Purchasing a home is a strong desire for most Australians and it is also an emotional decision. This should be quite distinct from looking at property as an investment.

Relative to incomes, Australia is now the second most expensive country in the world to purchase property.

However, prices cannot continue to rise forever regardless of supply and demand. In the end, property as an investment must eventually revert to a price resembling the total value of its income payment and land value combined.

This is the same as shares being correctly valued at the present value of future dividends plus the terminal capital value.

Shares are highly vulnerable to mispricing because the income resulting from corporate earnings can be uncertain. Nevertheless, purchasing a portfolio of shares is possible, affordable and quite easy to put in to practice.

Result: Shares wins this one for access and affordability.

Tangibility

No argument, property is a tangible asset.

You can touch it, see it and live in it. Many people have also owned, rented or lived in a home, so they often have a better understanding of residential property. Shares on the other hand are a bit of an abstract concept — and for many investors, an unfamiliar one at that.

Result: Property wins this one hands down — it is much more satisfying walking through your own investment property than through a Woolworths store in which you are a part shareholder.

Separability

While you can’t put part of a house on the market, you can sell down part of your share portfolio if needed. The exception here is buying property through a listed vehicle.

Result: Shares win. You can cash out a parcel of shares, but you can’t sell a bedroom.

Liquidity and transparency

We all know that shares are more liquid. If you sell one day, you will get payment within three days — or for managed funds, within a week or so. Property may not sell when you want it to, and settlement can take months.

Result: Shares win this one. They are more liquid and transparent.

Volatility

Property has historically provided low volatility relative to shares, although the infrequency of its valuation does create a bias in the results.

Imagine what would happen if everyone’s property price was posted in the daily newspaper for all to see.

The transparency of prices would surely create a perception of volatility and promote bad investor behaviour. It is often said that you can’t lose money in property.

However, while Australian property may be attractive at present, you only need to look at the US where property prices in some areas are close to zero.

While share prices may appear more volatile as they are priced daily, shares have historically provided high long-term returns, particularly in comparison to fixed interest and cash, and company collapses are relatively rare.

Result: Tie. Both classes include features of growth, capital risk, interest rate sensitivity, supply and demand, and legislative risk.

Income yields

Both shares and property have fairly stable income yields. Property yields follow demand/supply fundamentals reasonably closely, so higher rentals are reflected in rising prices, holding rental yields relatively stable.

Likewise, research available from the Reserve Bank of Australia website shows that the dividend income yield on Australian shares has held fairly constant at close to 4 per cent, to which the benefit of dividend income must be factored in.

Result: Shares by a whisker. Both shares and property have stable income yields.

Transaction costs

We have to measure the benefit to the client on a net basis. What are the costs?

Brokerage on acquisition and disposal fees is required when buying shares, but there is no ongoing expenditure and maintenance cost (unless you acquire shares via managed funds).

Property will have expenses for upkeep and costs associated with management. The major expenses are at the purchase and sale transaction in the form of stamp duties and other taxes, as well as agent fees.

Shares have a low lifestyle cost to an investor as it’s extremely unlikely an investor will be responsible for the day-to-day management of the company in question. Property, on the other hand, can be a significant lifestyle burden on investors who choose to perform some or all the tasks of ownership themselves.

Result: Shares win hands down since the costs of buying, selling and holding property far exceed most share portfolios. From a lifestyle and time perspective, property also tends to take more time.

And the judges’ ruling goes to

Both. It’s never a valid case that property is better than shares or vice versa.

As professionals in the financial services industry, we need to have our radar on the opportunities in both and consider how best to distribute the 100 cents we have in every client dollar to invest in an appropriate way that will assist the client to achieve their short, medium and long-term goals.

My verdict is that both shares and property offer opportunities for the investor and that perhaps a better question is: ‘how much in property, and how much in shares?’

If there needs to be a conclusion, it is that balance, true income and asset diversification and quality are important and that each investment needs to be considered within the context of the broader strategic advice proposition and the investor’s needs over the long term.

Rick Di Cristoforo is the managing director of Matrix Planning Solutions.