A question when raised amongst a group of close friends discussing their respective financial
planning ideas in the Pub on any Friday night, would provide a wide range of opinions, theories and personal preferences, in short, a lot of diverse thoughts further complicated by the influences of the vast amount of statistical information available, most of which is designed purposely to influence potential investors one way or the other.
Setting that aside, let’s examine just some of the information, with positives and negatives that a potential investor would have to consider before making a choice. For the sake of simplicity, we will use UK market statistics for comparison purposes.
Property
An important psychological point often overlooked, is that an investment property is something that can be seen and physically related to each time you return to it for an annual inspection and rental review with your tenant.
It can be acquired using a lender’s money utilizing a mortgage for investment leverage. If the property is located in an economically strong region, such an investment is potentially providing insulation from the vagaries of National and Global economic downturns.
The rate of capital growth and rental income potential for a property investment is therefore highly dependent on its location. In July 2021, in the UK as a whole, rents rose by 6.2% compared to the same month last year, but the north, east , south west and south east of the Country, all recorded double figure rental growth *and whilst property prices have recently risen to record highs across much of the UK recently, this may not continue however, with concerns about affordability; particularly as first-time buyers struggle to get onto the property ladder, in particularly within the regions of high growth.
Future longer term planning by an investor with property in mind, may include a requirement to eventually live in a particular high growth region and investing in that house some years previously, has now not only increased in value relatively risk free, but with rental income thrown in, might by the time of occupation also be a mortgage free asset.
Who is likely to prefer Property over all else?
A Property investor is likely driven by a firm belief that wealth is made up of tangible assets and not by a percentage shareholding represented by a piece of paper .This wealth should not be subject to the natural volatility of stocks and shares and is therefore concerned by sudden downturns in markets such as the most recent in March 2020.The investor is also likely to be planning to eventually live in the region in which they purchase and in the meantime will recognize that buying and renting out a property may be a complicated and expensive process involving Independent management and additional costs such as stamp duty and legal fees, never mind the occasional aggravation of dealing with awkward tenants.
This Investor will also recognizing that access to sound advice and perhaps a degree of personal knowledge when choosing where to buy is essential in order to avoid being priced out of certain regions and therefore wasting time and money.
The Global Stock Market
There are many ways of accessing the Global stock markets, with accompanying levels of personal control of investor preferences, from a variety of Mutual and Exchange Traded Funds to an inexhaustible supply of individual company shares for those preferring a more direct shareholding approach; even investing in what you use on a daily basis with Apple, MacDonald’s and Amazon being obvious examples, can give added stimulus to the process.
Having some understanding of the market, not unlike the property investor, is important, but with the potential for more volatility and therefore variable returns, understanding the relationship between risk and reward is an essential requirement of the stock market investor as well as an understanding that although trading in and redemption of funds is cheap, quick and efficient thanks to modern and improving technology, all returns are related to the market value of holdings at the time of sale.
The wise investor will always try to invest when markets are at a low point. For instance UK shares in sectors such as energy and travel contain a number of companies that are currently trading at very low prices and will be good long term growth prospects as life gets back to normality, which may not be the case 2 weeks form now.
Who is likely to prefer Global Market investing to Property
A market investor will probably own a property to live in but invest elsewhere for the sake of diversification as well as readily understanding and accepting investment volatility in exchange for not being tied to one single asset class and have a preference for immediate liquidity for when a personal situation changes. Having a limited amount of capital to invest may also be of significance, as relatively modest sums can be used to invest in the markets.
Comparing the returns
We have referred to the theories but the practicalities of the numbers are more complicated. Achieving steady capital growth and income from Property clearly depends on geographical location above all else; whilst Stock Market returns depend on politics, economics, levels of acceptable risk and time spent in the market.
Using historical returns alone as a bench mark for choice is not a good idea, but it does give a useful indicator of what might happen should similar circumstances prevail in the future.
Over the last five years, the total return for the FTSE 100 was +40.72% with dividends reinvested, or a 7.07% annualized return. Investing in a range of Company Stocks as opposed to tracking the index, with a 60year return of 5.3%, the compounding effect would turn GBP 50,000 into GBP 81,333 over a 10year period
The property sector has enjoyed an unexpected recent revival, however, thanks to savings made under the stamp duty holiday (now withdrawn) and rising rents bolstering a property owners returns
Using the same GBP 50,000 as the deposit enabling a property purchase of GBP 190, 000 and assuming house prices grow by 2.1pc each year, this property would be worth GBP 229,079 – a rise of GBP39,079 and with potential uninterrupted rental income of GBP 54 106, would turn GBP 50,000 into GBP 93,185 over a 10 year period.
CONCLUSION
“PERSONAL PREFERENCE IS IMPORTANT”
A world famous sommelier was once asked what actually made a good wine to uninitiated to which he replied that “if you like the taste, then it’s a good wine” and using that analogy, so much of investing is about personal preference and comfort levels, followed by the economic rationale and as this short study hopefully illustrates both sectors have their plusses and their minuses.
The good news is that NEBA can provide active services for the private investor in both of these important sectors with equal professionalism and understanding.
