SHARES VERSUS PROPERTY

Investment:
Research pumps shares

By Tamsyn Parker Wednesday Sep 12, 2012 NZ Herald

Grosvenor director Peter Christensen says a $10,000 investment in New Zealand shares
in 1971 would have been worth $787, 128 at the end of last years. Photo / Richard Robinson

Study finds 40-year return on stocks more than twice that of property

Investors would have been more than two times better off putting their money into the local share market than residential property over the past 40 years, according to research by KiwiSaver provider Grosvenor Financial Services Group.

Grosvenor director Peter Christensen says a $10,000 investment in New Zealand shares in 1971 would have been worth $787,128 at the end of last year - an average of 11.2 per cent growth a year. The same amount of money invested in houses would have grown to $367,352 - an average annual return of 9.2 per cent.

Christensen said historically investors had favored property investment and many were convinced it offered higher returns for a lower risk.

"However, long-term data proves shares and equities consistently outperform property as [an] investment," he said.

But property investor Olly Newland said it was very difficult to base returns from property on average prices.

He suggested investors would do better to compare the performance of the top 50 suburbs rather than the median price across all property as that meant including small towns.

If the median price of all houses were used, then Newland said a comparison should be made with all listed companies including the small penny-dreadful stocks.

Grosvenor researcher David Beatty said it could not use the figures from all listed stocks as the All Ordinaries index did not go back far enough.

"The NZX50 is the most quoted figure when it came to the share- market and the most used by investment experts," he said.

Beatty said he did not believe including all listed companies would change the figure much.

But Andrew King, president of the Property Investors Federation, said the comparison was flawed and the research was marketing for shares.

"They don't take into account rental income but will take into account dividends on shares," he said.

King added that banks would not lend on shares while they would lend money on property.

"For $10,000 you could buy a $50,000 property back in 1971 and the returns would be a lot higher."

Beatty said the survey had not included rental income in its investment return from property because it was difficult to find reliable data going back to 1971. It was also decided that a lot of rental income was eaten up by the costs associated with property.

Christensen said he was not anti-property, he just wanted people to diversify their investments.

"The message is any wise investor will go into a spread of different asset classes," he said. "By investing in other asset classes you can get a better return than just property . . . . “

More in the Herald: http://www.nzherald.co.nz

Peter’s Comment

Shares have several distinct advantages over residential property and not all the advantages have been shown above.

For example, investing in shares allows a greater spread of investment dollars. For the price of one house an investor can have shares in dozens of listed companies, in a number of industries, or in many countries. It’s an old rule: Don’t put all your eggs in one basket. And a house is an expensive basket.

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Also, if you need the cash, or you see a better opportunity elsewhere, a house usually takes months to sell and reach settlement and the fees take a huge bite out of the proceeds.

Shares can be traded online in minutes and the proceeds banked within three days. That makes it possible to use the highs and lows in the market and individual companies to pick up quick profits over and above those shown in the 11.2% above. It is this trading for quick profit strategy that makes shares the most attractive place for money with sharp investors making an extra 10-20% a year.

Others prefer to just invest and wait for it to grow while banking, or reinvesting, the dividends.

Naturally, an investor would steer clear of a company that could be vulnerable to an unexpected three month period without income (unless it was a seasonal business). But a residential property investor faces that prospect all the time. The tenant may suddenly leave and it could take three months to find another tenant, or worse six months to repair the damage.

True, a company could have an unexpected loss of income due to a strike, fire or other forced closure. But the wise investor has many other small investments and one company faltering or even failing completely will have little effect on the overall portfolio. Spreading the risk is like free insurance.

I suggest that a reason for not including rental income in the figures above is that it is so widely variable. Often with residential property after one allows for repairs, rates and periods without a tenant, there is little or no net income.