Is property a better asset class than shares?

Property investment generates income through rental payments while shares pay dividends, but which of the two actually brings better yield for the investor in the long run?

A lot of people would argue that shares consistently outperform the rate of capital growth of properties throughout a 10- to 20-year period. However, the growth rate in property and shares come closer as the investment reaches its 20-year mark—proving that time in the market is a significant contributing factor for the growth of properties. Moreover, property investment carries more appeal in terms of long-term returns based on initial investment amounts.

“Home buyers typically take out a home loan to purchase property, while it is less common for investors to take out a loan to invest in shares. Therefore, if you have a $100,000 deposit towards a $500,000 property purchase, the return will be a percentage of the $500,000,” according to real estate director Brad O’Mara. “Meanwhile, the return on $100,000 in share investments will simply be a percentage of $100,000—meaning there is a much greater return on property over time.”

Risk management

Both investment ventures obviously come with a certain level of risk, but which asset class has proven to be easier to manage?

Property investors often argue that the value of a tangible asset is more stable because it is dependent on the factors surrounding the market—information that could be gauged based on existing economic and historical data. On the other hand, shares are only as lucrative as the company is successful, so if the company goes into liquidation, an investor will most likely lose everything. The value of shares also fluctuates regularly across different sectors, making it harder to predict.

While property investors borrow a huge amount to purchase their asset, paying the mortgage for an investment property is also usually handled well by rent payments. “If for example, you buy a $500,000 property with 20 per cent deposit, once the mortgage is paid off, you have a $500,000 asset from an investment of only $100,000—this is before capital growth,” Smart Property Investment’s Georgina Brown said.

Simply buying in the right area will almost always ensure the growth in value of a property as demand remains consistent—a strategy that does not really apply when investing in shares. Despite these good arguments for property, a budding investor must be careful with negatively geared properties and decisions based on tax policy, which could both derail one’s investment journey when failed to be done the right way.

At the end of the day, due diligence is important to determine which asset class fits your capabilities and limitations as an investor, and which of all your options would the best way to achieve your specific financial goals.