Property or shares - which is the better investment?

Following on from the publication of an article on the efficacy of using gearing to create wealth through property investments, Rob Lawrence, National Manager for the bond origination company Rawson Finance, has received a number of questions regarding the relative risks of the two asset classes, shares and property.

Traditionally, says Lawrence, both have always outpaced inflation - but each carries some specific risks and both are likely to be affected in any serious downturn.

“At the outset it should be stressed that those contemplating investment should see both asset classes as long term operations,” says Lawrence. “Ideally, of course, the investment should take place at the bottom of the cycle and be cashed in near the top. In reality this is very seldom achieved: you have, therefore, to accept that you must be able to leave your investment where it is long enough to ride out any future down cycles - which in the nature of Western economies are inevitable - before you try to realise a profit. Property can seldom be a quick in and out instant profit investment - and shares are also really not suited to this, although there are always a few short term investors who trade in both.”

The biggest risk property investors face is that this asset is relatively illiquid, said Lawrence. Faced with an urgent need to sell, even if the owner reduces his price quite significantly, he will still face a delay while the property is sold, transferred and registered in the new buyer’s name.

“By contrast, shares are far more liquid - the investor can phone his broker and in most cases have his money within a few days.

“Although a few excellent shares will often perform well during a downturn, in general property holds its value better in bad times than shares do. This may be because bricks and mortar are more tangible than shares or because, while companies can stop paying a dividend, a property will in most cases continue to achieve some sort of rental, albeit on a reduced basis.”

Because share prices are published daily, says Lawrence, it is possible to value one’s share portfolio very accurately on a daily basis. This, he reminds us, cannot be done with a property portfolio and this factor, he admits, makes the decision of when to sell a little more difficult.

“One of the biggest factors influencing investors trying to choose between the two asset classes,” says Lawrence, “is that buying and selling shares is a relatively hassle-free operation, whereas managing a rental property can be difficult. Finding reliable tenants who pay on time and do not trash the place can be a challenge. However these problems can be greatly reduced if the control and management of the unit is handed over to a reputable letting agent.”

Summing up, therefore, Lawrence says, “No one asset class is invariably better than another. Certainly neither is risk-free, although in most cases the risk will tend to diminish over time. The good news is that both asset classes are inflation beaters and both can produce satisfactory revenue streams if structured correctly. There is no right or wrong answer to the question, ‘Which asset class is best for me?’ Each of the positive and negatives must be weighed by the individual concerned in terms of the risk he is prepared to take and the goals he is striving for. Generally, however, property does attract the investor anxious to avoid any significant risk and possibly lacking the resources to go it alone without gearing. By contrast, shares can be right for the man who studies the Securities Exchange daily and is really well informed on the likely future performance of every share he buys. This can be a very time-consuming operation and therefore again not suited to the amateur or inexperienced investor who is probably best advised to stick to property.”

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