Property values have always been a favourite topic for discussion at dinner parties, particularly when prices seem to be heading ever upwards and everyone wants a piece of the action. Obviously o
Property values have always been a favourite topic for discussion at dinner parties, particularly when prices seem to be heading ever upwards and everyone wants a piece of the action. Obviously over the last couple of years it?s became a question of how low prices can go and how long for. I?ve enjoyed my fair share of property debates, including those which centre round whether property or equities are the best investment.
The Sunday Times published an interesting article in August entitled ?The Great Debate: Property or Stocks?, which presented statistics on the performance of both assets over the last 50 years.
The property versus equity debate is even more stimulating at the moment because the argument that equities beat all other assets over the longer-term took a knock when property beat equities hands down over the last decade. However you cannot ignore the longer term returns – for periods longer than ten years equities have outperformed property. Also what historically happens to share prices after such a ?lost decade? weighs in equities? favour.
Barclays Capital and Nationwide (equities and property respectively) provided the research for the Sunday Times. All the returns are real returns after inflation and the share returns are with dividends reinvested.
If you look at the last 50 years, property made an overall real return of 356%, averaging 3.1% a year. Equities returned 1,474%, averaging 5.7% p.a. Over 40 years property gained 223% (3% p.a.) compared to equities? 456% (4.4% p.a.).
Over the last 30 years, equities? outperformance is even greater, earning 692% (7.1% p.a.) compared to 108% (2.5% p.a.) for property. Likewise over 20 years shares returned 145% (4.6% p.a.) compared to 34% (1.5% p.a.).
The story changes when we look at the last 10 years. Property gained 71%, while equities made a 14.4% loss.
Looking ahead, we know from history that share prices bounce back very strongly after bear markets. According to the 2009 Barclays Capital Equity Gilt Study, there have been 16 previous ten-year periods where shares fell in real terms? but then share prices came storming back, recording an average return of 11% per year for the next 10 years.
The research Barclays Capital compiled for The Sunday Times article found that if you had invested near the end of the 1973-74 bear market, you would have made an average 23% over the next 20 years? and it sees similarities between 1973 and 2008.
Looking at the history of house prices, they only really began to surge after the ?Lawson boom? of the 1980s ? a boom that was of course followed by a bust and house prices did not recover until 1998. Will it take until 2016 for prices to return to their 2007 peak?
In spite of house prices having risen since the start of the year, estate agent Savills expects them to fall 7.2% this year and 3.1% next year and the Ernst & Young Item Club predicts it will take at least five years for prices to return to their autumn 2007 peak.
Both property and equities offer the potential for high long-term returns. For many investors, however, there is a persuasive argument in favour of equities: diversification.
There are four main areas of investment: cash, property, equity linked holdings and fixed interest holdings (bonds). By combining all or some of these elements in your portfolio, it is possible to reduce risk and improve prospective returns since the risk in the mix of the asset classes is less than the risk of the individual components. This leads to lower volatility and less risk of negative returns.
If you already own the house you live in, buying a second property may make you very overweight in this one asset class, especially if you don?t own many equity or bond holdings. When property prices fall, both your properties will probably fall in value, whereas equity holdings may be performing well at the time. While prices fell for both property and equities over the financial crisis, they do not generally move in tandem.
There is a second diversification argument ? holding a range of different investments within each asset class helps reduce risk further. In the case of equities, you could own shares from a range of completely different companies and sectors and spread them across the world. However, most people can only afford to buy one or two investment properties, giving them little or no diversification.
There are other arguments in favour of equities.
Equities have high liquidity ? unlike property, you can sell easily and quickly if you suddenly need the money. If you require small amounts of cash you can just sell the amount you need, and not the whole investment.
You don?t need a large capital outlay to start building a share portfolio and the ongoing costs are much lower than with property.
You can structure your share portfolio to be very tax efficient.
Owning equities also represents your share in the wealth-creating capability of the world. You own a small part of a business, one which was set up to make money for its owners. Other investment assets don?t actually create new wealth. Property prices depend on demand, and demand depends on how much wealth there is around at the time.
Property has its benefits too. It tends to be less volatile than equities and there may be potential to add value, for example by adding an extension. Some people simply prefer the tangibility of bricks and mortar (though that becomes much less attractive when you cannot find a buyer).
In reality, the question for many people shouldn?t be ?property or shares??, but rather ?how much in property and how much in shares??. You need to consider the property, equities, bonds etc you already own, including the house you live in, before determining which new assets to buy, so that you end up with a balanced portfolio.
If you determine that you would like to add more property to your portfolio, you do not have to buy a single, actual property. It is possible to invest in property with many of the same benefits you get from equities as described above. This would be through real estate securities, for example buying shares in a Real Estate Investment Trust (REIT). You get high liquidity; you can invest as much or as little as you please (within limits); you won?t have the costs related to owning direct property and you will get diversification over sectors and countries, including the high growth areas of developing markets.
While these securities suffered along with other assets over recent years, as the economy recovers this could be the ideal time to enter this market. Of course, as always, you need to speak to a financial adviser like Blevins Franks to establish what investment strategy is suitable for you.
By Bill Blevins, Managing Director, Blevins Franks
16 September 2009
