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Property vs. Shares – an “apples to apples” comparison

With the recent lacklustre performance of the sharemarket and the rising popularity of property in self managed super funds, it’s no wonder the “property vs. shares” debate has flared up again. Being pro-property myself though, I thought it best to really look at the numbers first before I came out with guns blazing.

This is actually a lot harder to do than I first thought, as both investment vehicles have their own characteristics. Average growth rates, levels of leverage, income generation and tax benefits differ in each class and can make a straight comparison difficult.

Nevertheless, I have set out to construct a scenario based on conservative industry averages and their performance in each market over time. A large number of assumptions have been made, but (being pro-property) I favoured shares slightly more to make sure there was no bias. I also didn’t know how these results would turn out prior, although I’ve always been curious when people compared the two, why property didn’t beat share performance over time simply because of the high levels of leverage property investment allows. Please also keep in mind that I am in no way a financial planner or qualified to offer financial advice. This is a generic example and may not suit your own personal circumstances.

I have created the investment amount by calculating the cost of purchasing a $700K property, then taking that same figure to the sharemarket to see how it would perform over the same period (10 years).

Purchase Price$700,000
Deposit 20%$140,000
Stamp & Legal$35,000
Total Investment$175,000

 

The Basic Assumptions

Property

  • Growth rate is the national average – 8% per yr
  • Rental Yield – 4.5% per yr
  • Ongoing strata and maintenance costs – 1% per yr
  • Repayments at 80% LVR – Interest Only – 7.8% per yr
  • Tax deductions based on highest marginal tax rate
  • Investment would be sold at the end of 10 years
  • Agents selling fees would be included – 3% of sale price
  • All profits would be subject to CGT at highest marginal tax rate
  • Market performance is consistent over time

Shares

  • Initial share price and dividends based on 10yr historical CBA figures
  • Growth rate – 11% per yr
  • No margin lending occurs
  • Fully franked dividends paid every 6 months and re-invested immediately
  • Tax deductions based on highest marginal tax rate
  • Investment would be sold at the end of 10 years
  • No minor brokerage fees are included
  • All profits would be subject to CGT at highest marginal tax rate
  • Market performance is consistent over time

So at the end of 10 years, how did things fare?

SHARES

Portfolio Value Yr 10$726,038
less original purchase price$175,000
Gross Profit$551,038
less CGT$126,739
Net Investment Value$599,299

PROPERTY

Property Value Yr 10$1,511,247
less original purchase price$700,000
less deductible ongoing costs$44,215
Gross Profit$767,033
less CGT$176,418
less agent’s selling fees$45,337
less Stamp & Legal$35,000
plus original deposit equity$140,000
Net Investment Value$650,278

 

Property Value Above Shares: $50,979

As you can see, property can fare better over time, even under a conservative strategy. The assumptions have a major impact however and the main considerations I found that makes these investments even more powerful are listed here:

Leverage:
Borrowing levels were calculated based on today’s economic climate. An 80% LVR is quite common, and conservative, but anyone who owns shares would probably agree that margin lending in this climate is highly risky.

Lifting the LVR to 90% for property would put property in front by nearly $200K under the same scenario, but if you were to maximize your margin borrowing to purchase more shares, they could outperform property. Using margin lending however may subject you to a margin call, something that would never happen with property.

Selling:
Ideally you would never sell property. Unlike shares, the transaction costs can be quite high ($45K to the selling agent) and if you were to keep the property into retirement you would also forgo any capital gains. That’s right. 0% tax.

Reinvesting Equity:
As a share portfolio is quite liquid and dividends can be received as income quite regularly, it was assumed all income would be reinvested immediately. What was overlooked though was the ability to redraw on the equity in the property in the third or fourth year to put down as a deposit on another property. Purchasing only one more property would have allowed this portfolio to gain further equity in the remaining six or seven years.

Liquidity:
What did stand out for me was the virtual absence of any additional funds required for the share portfolio to grow over time. Property does require funding, and even when it’s tax deductible, it’s still money out of pocket. You can also sell shares in a single phone call should your circumstances change, something which can’t be said for property.

So in conclusion, there are definite advantages for property as an investment vehicle as long as you’re willing to contribute to the investment over time, so understanding the nature of each investment vehicle is critical.

The level of borrowing that you’re willing to take on can play a major part in the performance of the investment, as well as the level of risk you’re prepared to accept, so be sure to sit down with a qualified professional who understands your personal circumstances and you should be well in front of the game.

For anyone who would like the workings of this exercise in spreadsheet format, or if you have any questions about this exercise, please email me at josh@yourmepire.com.au.


By Josh Masters

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