Daily Market Update

Property or Equity? Which is the best investment?

Mark Twain said; “Buy land, they’re not making any more of it”

One question I am repeatedly asked is this: “which is a better investment, Property or the Stockmarket”.

As with so many things in life, the answer is “it depends”.
I have to agree with Mark Twain’s observation. Land is a finite resource, and we live on an Island. You don’t need a PHD in stating the obvious to realise that an investment in land or property should, over time, appreciate. Property isn’t a bad investment.

However, when it comes to the question, which is the best investment think of it like this……..

If I am a business making widgets in a factory, I need a building to house that factory. My company can either buy or lease the premises. But the key consideration is this. It makes economic sense for me to use the property to run my business. In other words, I can add more value from the production of the widgets than I can from the property itself.
Now, it doesn’t matter what I choose to do in the building I could be a hairdresser or a Lawyer, the fact remains that after costs (ie rent or loan repayments to the bank) I can make a profit from my business.

Intuitively, a company is sufficiently rewarded from taking the risks of running a business that it can make more money from carrying on in business than it can from simply renting the premises to another business.

Logically, which is the best investment? An investment in Equity of course. Buying companies should reward an investor more than an investment in property in the long run. Numerous studies and empirical evidence has supported this conclusion.

The difference is that an equity investment is typically more volatile. The moves in price up and down are more rapid and therefore we say that the risk is greater. However, property is a relatively illiquid asset. Ask my client who bought a property in Florida as a “sure thing” and still can’t sell it some two years later.

Equally, when it comes to a private investor who may have hundreds of thousands or even millions of Euro tied up in residential property through their main residence, common sense says, that a prudent investor would look to invest in something other than more residential property.

We had a client the other day tell us that they were diversified. They had a property in Ireland and one in Spain and one in France………diversification? I think not.
Marc Westlake Dip PFS,QFA

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