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Financial Advice | Investing | Private Equity
If you are looking for a long-term investment, you may find yourself choosing between real estate and investing in the stock market. But before you make a decision that could potentially impact your long-term financial objectives, it is important to compare the two asset classes side-by-side.
Property is viewed by many investors as one of the safest investments one could make, as you own a physical asset. It has traditionally been viewed as the ultimate stable investment that will protect your wealth during unstable economic times. Over the long-term, the property market has performed well in many countries, particularly in capital cities where demand is strong, such as Prime Central London in the UK.
To make a direct comparison between property investment and the stock market, it is worth noting that both asset classes play an important role in the long-term strategy for investors at all levels, with both options, statistically, providing positive returns over the longer term. They are, by all accounts not directly correlated which can bring some stability to portfolios. It can be argued, however, that investing in the stock market, over a significant period, will generate better results.
Like any asset class, both have their advantages and disadvantages. If you are choosing one over the other, then it’s worth taking the below into account before you decide:
Unless you are investing into Real Estate Investment Trusts (REITs), real estate as an asset class is illiquid. Releasing cash relies on the time to sell the asset or loading debt into the equation, so when investing in property you will have to accept that you will not be able to easily access this capital. This capital value will also be subjective, in that it is only worth what someone is willing to pay for it at any given time, which can be adversely influenced by general market conditions, and of course, interest rates.
There are a number of expenses involved in purchase and ownership. Mortgage fees, legal fees, surveyor fees, maintenance and management costs will all need to be taken into consideration when you work out the eventual return on your investment. If you decide to rent out or lease the property you will need to include the additional income on your tax bill.
Purchasing an investment property ties you to a particular location. Whilst it is true that the property demand in major cities worldwide has increased, what is considered to be a desirable area in today’s market may not be as desirable in 15 – 20 years’ time.
Renting or leasing is a favourable option, because of the additional income. However, you will have the additional responsibility and legal obligations that come with being a landlord. Letting agencies are a good option for time-poor landlords since they will take responsibility for finding tenants and making sure your property remains in good condition, but this comes at a price.
Property development has become very popular over the last three decades worldwide, and many local regulatory authorities are aware of this. As a result, laws on foreign ownership are much stricter to prevent local buyers from being priced out of their markets. Even if you are not a foreign national, you may need to fulfill certain criteria prior to purchase, especially if you are not a resident.
If you are a foreign national, upon the disposal of property investments, it is likely that the proceeds will be subject to local Capital Gains tax. Additionally, a more topical trend is for governments to
apply ‘death tax’ or ‘inheritance tax’ on the value of the property assets, which must be paid before transferring ownership to the next generation.
Stocks and Shares
Investing in equities is quicker and easier than purchasing real estate as there is much less paperwork and red tape. In today’s digital world, you can track and manage your investments using your smartphone in real-time and from anywhere.
There are less additional costs involved and depending on where you are resident, you may have access to a tax-free investment vehicle. This could allow you to reduce your tax bill by a considerable amount when your investment reaches maturity.
Buying stocks and shares allows you to diversify, so you don’t have to focus on a specific country or sector. While diversification in the property market is not impossible, you would need a much larger upfront investment to get the same level of diversification that you would get from a considerably smaller initial investment in a fund with global interests.
Risk averse investors may be put off by the volatility of equity markets, especially in times of poor political and economic uncertainty, believing that real estate offers more security. But when buying shares, you have the opportunity to tailor your investment to suit your attitude to risk. Spreading your interests over more than one region or sector can minimise any negative economic effects.
Whilst it is true that equities could potentially bear more risk due to their inherent volatile nature, risk can be greatly reduced by constructing a well-diversified portfolio and the overall value will increase if you hold onto them over the long-term. In fact, when opting for dividend reinvestment, shares have been shown to outperform real estate over the medium to long-term due to the effects of compound interest. This can be seen using the example below.
For a £500,000 sum invested over a given 15-year period, investment in a UK residential property resulted in a 400% total return on investment, increasing the total value to £2,500,000. However, property location is an important variable since there were lower returns in certain areas and in some areas growth was minimal.
In contrast, £500,000 invested in UK equities over the same 15-year period resulted in a 1,350% total return on investment, provided dividends were reinvested. This increased the total value of the investment to £7.25 million.
The above example shows how you could get significantly greater returns when you invest in equities over a medium to long-term, provided you invest all dividends.
Committing a sizeable lump sum of cash in a long-term investment is a decision that requires thinking about your future plans and goals. There is a myriad of considerations relating to costs, taxes, market forces and risk management. Working with a holistic wealth advisory allows you to cut through the complexity, make more informed decisions and stay focused on what is important to you. For advice on your investments, speak to our professional advisers.
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