22 Nov Should We Trust Property More Than the Stock Market?
Many investors are drawn to property as an asset class. It is not difficult to understand why. Property can generate both income and capital growth. Most property investors believe that they have some control over the investment, either by choosing the right property or making improvements.
It can feel like a solid, dependable investment when compared to the daily swings of the stock market.
But is property really a better investment than shares?
There is no doubt that the government are trying to discourage buy to let investors. The taxation landscape disadvantages property investors when compared to other types of investment or business.
For example, interest costs on loans are considered to be a business expense. However, in the case of a buy-to-let property investment, tax relief will soon be restricted to basic rate only.
Property investors also pay more in Capital Gains Tax than other investors.
New legislation now means that acquiring additional properties is, in most cases, subject to an additional 3% in Stamp Duty.
If investors are not deterred by the tax treatment of property, they are unlikely to be discouraged by the additional responsibilities, maintenance and the considerable expenses involved.
Perhaps even the most unpredictable aspect, human behaviour, is within acceptable risk parameters. After all, everyone needs somewhere to live and most people can be trusted to keep their home in a good state of repair.
But how does property actually hold up as an investment?
The UK house price index has increased by 40% in the last 10 years. This is, of course, skewed by London prices, which have risen by 77% in the same period. A typical home in the North West may have only gained 25%1. This is offset slightly by the fact that rental yields tend to be higher where property prices are lower, although many property investors find that most of their income is accounted for in costs, repairs and interest.
During the same time period, the UK All Companies Sector has returned 120.8%. Even the Mixed Investment 40% – 85% Index has returned 93.1%, while holding a maximum of 85% in shares2. These are simply averages, with many individual funds (including some passive index trackers) producing even higher performance.
Investing in shares or funds has other advantages. The investment is more liquid and can be sold more easily. It is also a simple matter to re-invest dividends, compounding the returns over time. Remaining invested for the long term, even throughout rocky market conditions, has continually proven to be the best approach.
In comparison, the UK Direct Property Index has returned 73.2% over the same time period3. Even taking into account manager expertise and economies of scale, property funds have consistently performed behind equities.
In conclusion, while there are clear reasons for an individual investor to prefer property as an asset class, the facts are strongly in favour of equity-based investments. Of course, there may be a place for property as a small part of a diversified investment portfolio.
Please do not hesitate to contact a member of the team if you would like to find out more.