Investing in property or shares
Property is always better than investing in the Stock Market, isn’t it?
In Ireland we do love to own property, perhaps this is due to our history whereby we were ruled by the English, and inherently in our genes we want to own land as this forms part of our identity. Property is very tangible, and you can see it and touch it. Although property has proven to be a good investment over recent times, does it still represent a good return when comparing it to investing in the Stock Market?
Owning a property or buying shares, really does come down to personal preference. Both assets can earn a good return, however clients tend to invest where they feel most comfortable.
I have tried to compare both assets to see how they have performed historically over the last 5-6 years, between 2013 up 2018. I have also provided my own personal view on investing in both assets.
What does it mean investing in Shares?
A share is a unit of ownership in a company. If you possess shares in a company, then you’re entitled to a proportionate amount of the organisation’s profits, paid to you as dividends. For example, say you own 1,000 shares in a business, of a total 100,000 shares. This means you would own one per cent of the organisation and receive one per cent of its dividends.
Shares are sold on the stock market or exchange – such as the Irish Stock Exchange. You can typically buy shares through a stockbroker such as Davy or online which can often be cheaper through a platform like Degiro.
You can also make money in the sale of shares back to the stock market, as the assets may have appreciated over time. For example, while you might have bought your shares for €10 a share, you might later sell them at $11 per share for a 10 per cent return.
What’s important when it comes to investing in property?
When purchasing an investment property in Ireland, the key determinants of wealth are capital appreciation and the income return or rental yield. However, it is also important to be aware of the costs of owning a property such as debt cost, cost of repairs, legal fees etc, and worst-case scenario where your property is vacant for a period.
To purchase an investment property in Ireland you will need to have a deposit saved of 30% of total mortgage cost. All rental income is taxable; however you can claim back relief on interest payments. In my opinion, as an investor it’s important to decide whether it’s capital appreciation you’re going after, or rental yield. It’s really important that the Investment Property provides a profit to the investor after tax, otherwise there is no point in retaining the investment.
Property was at its lowest point in 2013. Up to 2018 prices have increased by 76% nationally and 90% in Dublin. (source: CSO) If you had purchased a 2-bed property in Ballsbridge for circa €236,000 it would now be worth €450,000. It would also provide a healthy rental yield of circa €2,000 per month. If you owned the property with a cost price of €236,000, this would provide a rental yield of 10%. However, owning the property at €450,000 would still provide a yield of 5.3%.
Comparing this to International share and 2 Irish shares.
Facebook shares were $31 in 2013, and in February 2018 they were valued at €190. Facebook Shares have grown by 600%
Ryanair Shares were €5.00 in 2013 and in February 2018 they were valued at €16.71. They have grown by 334%
Kerry group Share price was €38.66 in 2013 and in February 2018 they were valued at €82. They have grown by 200%.
Clearly from a growth perspective you would have made more money by investing in these three shares. However, there is a big risk with shares, as they could very easily go the other way. However, investing in strong profitable companies, that have a strong customer proposition, have a good change of increasing their value over time.
If it’s too rich to invest in the stock market and make stock picks, many of the insurance companies offer a solution by providing customers access to a managed fund where they invest money on your behalf and invest in 100’s of companies. An example of fund that has performed well over time, is the Dynamic fund performance with Zurich Life, between 2013 and 2018, it is up 80%.
PROS AND CONS TO INVESTING IN SHARES
Liquidity: Share investments are liquid, allowing you to cash in when you need to
Ownership: You own part of the business without contributing to it’s day to day operation
Capital Growth: wisely invested shares have the potential to make capital gains at a faster rate than property
Income: you can receive regular income flow through Dividends
Volatility: Stock prices can fluctuate in the short term, which could be unsettling for investors
Discipline: Investing in share can be emotional and requires discipline to deal with the peaks and troughs
Pros to owning a property
Familiarity - Irish people generally feel more confident investing in real estate. This is because it’s a more familiar concept
Inflation protection: Property may be used an inflation hedge, protecting against the purchasing power of the Euro
Leverage: Once you own a property, you can use leverage to buy other properties, by releasing equity
Tax benefits: Interest relief on purchasing an investment property, interest payments are fully tax deductible
Cons to owning a property
High maintenance: you generally need to cover rates, insurance, and maintenance.
Property Market crash: property is a very illiquid asset, so if a crash happens very difficult to sell.
If it is not rented, you will lose money
Property often cost money through interest payments
In In summary, at the end of day, one asset is not necessarily better than the other. Most people prefer to invest in what they’re comfortable with. Most people are more familiar with buying property as an investment rather than stocks. Real estate is tangible, you can touch it, and live in it, feel it. Owning real estate also often feels less complicated. If you buy a property in a good location, and with population increases, and a demand there, you would expect it to increase in value over time. The one downside with real estate is the extra management, it requires time and money to manage tenants, and to upkeep the property.
Comparing this to the stock market over the last 100 years, history has shown it to be a consistently good wealth creator. By owning stocks and shares, you can own a part of business without having to do the work. By owning shares in a company, you earn a return through capital appreciation and dividends. By investing in a profitable company, you can increase your returns year on year. High-quality stocks not only increase their profits year after year, but they increase their cash dividends, as well.
In my opinion, both assets are linked to the world economic conditions. However, with stocks and shares you can invest globally and invest in companies that are creating value worldwide, and you’re getting a slice of the action. With real estate your stuck in a certain location, and if this is Ireland, the property market is linked to the overall health of our economy. In many ways it’s can be less diversified.
In my opinion I would use both as a method to grow wealth, but always look for value, and don’t pay over the odds for shares or property.