Property or shares, or both?

It’s possible that you’ve been asked at some point whether you’re a ‘shares person’ or a ‘property person’ – the assumption being that people have a natural affinity to invest either in shares or property. That is, you ‘like’ shares more than property or vice-versa.

And it’s true. There are people that favour one asset class over another, usually following the preferences of their parents. But in practice, there’s no real need to favour one over the other. Here’s why...

The low down on property and shares

Both property and shares have produced good returns for investors over time. On average over the last decade, listed shares have produced total returns of around 9.5 per cent per year (Sources: CommSec, Iress). These returns are measured using the All Ordinaries Accumulation index.

Now, there are a number of observations.

 

The first is that the usual adage applies – past performance is no guarantee of future returns.

The second is that average returns will vary over time, depending on the time period used for comparison.

And the third is that we’re measuring broad returns for each asset class. The All Ordinaries Accumulation index was used to measure returns across the Australian sharemarket. And the CoreLogic total return series measures returns for houses and apartments across the country.

In practice, it may be harder to replicate the exact returns.

For residential property over the same period, total returns averaged 9.4 per cent per year. In this case the returns have been measured using the total return series issued by property company CoreLogic.

While returns on shares were slightly ahead of those for residential property over the past decade, if the time period was reduced to eight years you’d see a slightly different result. In this case, average returns on residential property slightly exceeded those of listed shares.

Bricks and mortar, or real estate more broadly?

Certainly, in terms of the sharemarket, there are a number of ways that an investor can track the performance of the broader market or individual sectors. Options include Exchange-Traded funds (ETFs), listed investment companies (LICs) or a managed fund.

Each approach is different – a topic we could cover extensively in another article in its own right! But, suffice it to say, there are a number of ways to track the Australian sharemarket rather than buying a raft of individually listed companies.

Now, for those seeking exposure to residential property the approach is usually a little different. That’s because people tend to favour property over shares because they like owning a ‘bricks and mortar’ or physical asset. But, the prospects for returns on that investment will depend on a range of factors such as the location, condition of the property and the type of property.

And, as is the case with purchasing shares in just one company, purchasing one physical residential property may not replicate the returns achieved for the broader Australian sharemarket. It may involve a number of property purchases, which could require a significant outlay in practice.

It is still possible, however, to track returns on property. It just requires a different approach. That is, you may need to purchase ETFs, LICs or managed funds to get the breadth of coverage.

One possible advantage here is that an investor could track returns on real estate more broadly. That is, obtain exposure to commercial property, such as retail spaces, offices and factories. And, apart from ETFs, LICs and managed funds, the door opens to real estate investment trusts (REITS).

It could also be that part of the allure of property is the desire to follow different aspects of the sector. This includes following the fortunes of building material suppliers, residential builders or developers, marketing or publishing groups and construction and engineering companies. While buying shares in individual companies may get you the exposure to property sector you seek, it could prove to be a more active approach requiring you to monitor the vagaries of property cycles.

So, what’s the answer: well, as is always the case with investments, there are a range of approaches available to suit your own goals and objectives.