The Big Question: Property or Shares?

Are you better investing in shares or property? In truth, it’s probably not so much a question of which is better but which suits your needs at any given time. And in a diversified investment portfolio, you should probably have both anyway!

Australian property prices have continued to increase throughout 2009, and show few signs of slowing down. According to figures from Australian Property Monitors (APM), Australian house prices rose by 7.1 per cent up to September this year.

Meanwhile the sharemarket has recovered significantly since its low of 3111.7 in March 2009, it still has a long way to go before it reaches its peak of 6850 again.

Different characteristics

While shares and property are commonly grouped together as growth assets, each asset has distinctly different characteristics.

With shares, the advantages are that you can get away with only a modest outlay and you can buy and sell relatively quickly. On the downside, shares can be very volatile as we recently saw when the market slumped.

In contrast, property requires a larger outlay and buying and selling can take several months. But at least the market tends to be less volatile.

Matthew Bell, economist at APM says the global financial crisis has forced them not only to think about the long?term return of an asset class but also the risk.

“While equities may have a higher long?term return, they also have a much higher risk than an
investment in property,” says Bell. “Anyone with the majority of their wealth tied up in housing over the last few years will be in a much better situation than someone who had most of their wealth in the stock market.

“Investors need to consider not just returns but risk (volatility) also. In a risk?adjusted sense,
property stacks up very well against other asset classes including equities and we only need to look to the last few years to see the cost of not considering risk when investing. An optimally diversified portfolio would include both equities and property” he added.

John Lindeman, head of research at Residex, says shares can suit a start?up investor who is looking to generate enough capital to buy into property.

Property also allows you to value add to your investment.“If you have property you can improve it yourself” says Lindeman. “You can’t paint the front of an ANZ bank building and have that increase the share price. But you can renovate a property and increase its value.”

Diversification

Both shares and property provide diversification opportunities. Shares allow you to choose whether you want a mining or an industrial stock, or even a property trust. You might decide on stock that has the potential for capital growth or one that pays dividends.

In much the same way, it’s possible to choose a property in a regional area which costs less, has lower potential for capital growth, but delivers strong rental yields. Alternatively if you’re after capital growth over income – an option typically suited to younger investors – then you can buy a property in a city which will increase in value much more rapidly than one in a regional centre.

It is often said that shares are a short?term investment opportunity while property is for the long term. However given the recent fluctuations on the sharemarket, investors should view shares as a long?term investment also. This way you can give your share investments time to recover should they take another hammering like that experienced in recent times.

Both shares and property provide great opportunities for investors, and both should ideally play a part in your investment portfolio.

Key points
• Property is less volatile than shares
• Consider risks as well as returns
• Property and shares should both be long?term investments
• A strong, diversified portfolio features both shares and property.