Property v shares: Which is the best assest class to invest in?

GUEST OBSERVATION

I personally invest across all asset classes, property, shares and cash and I was interested in finding out how my property investments stacked up compared to other investments in my portfolio over the long-term.

So with that in mind I thought I would undertake some research into the performance of the two major investments in my portfolio, property and shares, and which is the better asset class to invest in. 

This is an age old question and the answer will depend on who you talk to. However, I wanted to strip the debate right back and look at recent data. As they say in the classics “you can’t argue with the facts”.  So, here is what I discovered.

According to statistics and the reputable Russell Investments/ASX Long-term Investing Report 2014, the past 10 years may have been a great time to invest in the equity market, but residential property delivered better, more steady returns over the longer run.

The report concludes comparing the total returns - after fees, and including rental and dividend incomes over the past 10 years up to the end of 2013, that Australian shares unsurprisingly led at 9.2% even after the crash associated with the global financial crisis.  It was closely followed by hedged global shares which delivered an 8.2% return. Investment property lagged behind at 6.1%, comparable to fixed interest over the same period.  

But the results over the past 20 years look quite different.  An investment in residential property returned a 9.9% gain, beating both Australian shares at 8.7% and global shares at 8.0%.  In addition, over the past 20 years residential property delivered steady rental returns compared to the erratic equity market.

However, the report also shows that the dominance of property over shares in the 20-year period becomes reduced after the tax benefits of the fully-franked dividends provided by Australian listed companies are factored in.  At the top marginal tax rate, property delivered a 7.5% return over the past 20 years, only just ahead of a 6.9% return for shares.

So now I sit back and look at the numbers provided by economists and then equate this back to my personal situation.  Have I achieved the sort of growth quoted by the reports? 

Firstly, returns vary from property to property and for me have not been as consistent as quoted within the report.  Yes rental returns have been consistent, with very little no vacancy periods and consistent CPI increases.  

Some of my properties have performed well and above the returns quoted and others below, however the same could be said about the shares.  The performance of individual assets, are probably more of a function of location and selection of the particular property or share investment, more than the Investment class itself. 

So, for me yes the returns are important but there are other reasons why I see property as a strong investment.

1. As the report states, property delivers steady rental returns due to low vacancy rates and low supply, we are simply not building enough properties quickly enough in areas where people want to live to accommodate the growing population.
   
   
2. Lenders see property as a solid security and will lend up to 80% (in some cases more) of the asset at historically low rates, and even though my shares are more liquid it is more complex to borrow against them.  However the ability to access equity in property (without selling) is quite simple, as property lending is mainstream for banks that are aggressively competing for market share.
   
   
3. The tangible ‘see, touch and feel factor’ of property provides me with comfort and gives me control.
   
   
4. The ATO allows me to claim the tax benefits of depreciation on the building and various inclusions over a number of years, although some conditions do apply.  In other words on top of the rent I receive, the tax office is assisting my cash flow by allowing me to claim depreciation on the capital outlay. You cannot depreciate a share!

My conclusion is that both asset classes are an important part of my portfolio but the key is in the selection process. Seek professional help when it comes time to making your choice. 

For property I would recommend you speak to a registered buyer's agent and with shares a licenced financial planner. Assuming I have purchased the property well, specifically in the right location, taking into account the points 1-4 above and the economists research (numbers don’t lie), then I feel very confident that over the longer term my property portfolio will grow and is a good and solid investment.

David Naylor is non executive chairman and co founder of Chan & Naylor.