Property or shares in today’s market?
Just over half Australia’s household wealth is held in housing1, making us one of the most confident property investing nations2 And with interest rates at historic lows and uncertainty in global equity markets, there is an expectation more investors will enter the property market3.
But is this belief in bricks and mortar still well-founded? We weigh up the pros and cons for property and shares in today’s market.
Timing the market
When we look at past performance, residential property investment has come out on top over the past 10 years – but only just. According to the ASX 2016 Long-term Investing Report, gross returns on residential property in the 10 years to December 2015 was 8.0%. This compares with global bonds at 7.3% and global shares at 6.2%.
The report notes that cracks are starting to appear in the housing market, with negative growth period in the fourth quarter of 2015 – the first time since 20124.
Focusing on quality assets will make the difference for
long-term gain – whether in shares or property.
While property is traditionally seen as a less risky investment than shares, specific housing markets can fall – as we’ve seen recently in Perth and Darwin1. Timing your entry and exit to the property market is just as important as timing an equity investment. And obviously, past performance is also no indicator of what may happen next in either market.
The hunt for yield
The price we pay for this continued housing price growth is an increased pressure on rental yields – especially in Sydney and Melbourne with gross rental yields now at 3.1 per cent and 2.9 per cent respectively1.
Compare that with current dividend yields and term deposit rates, and the income return on property investment looks a little less favourable – especially if the expected increase in apartment supply in inner Sydney and Melbourne areas1lead to longer vacancy periods.
On the other hand, there are no guarantees dividends will be paid. This is why diversifying investments across asset classes is simply common sense.
Simson Sanaphay, Citibank Product Specialist, believes that "in a world of persistently low interest rates, income-starved investors will come to the equity market or seek alternative investments to find yield."
Ben Streater, Citibank’s Senior Manager – Investment Products, is also seeing increasing interest in Citibank’s structured and fixed income products.
"Fixed income investing is becoming more popular as an alternative way for investors to generate returns," Streater comments. "Our clients like the certainty of income more than the uncertainty of growth, because once you’re paid income it can't be taken away from you."
Quality is the key to capital growth
Focusing on quality assets will make the difference for long-term gain – whether in shares or property. This is where research into specific opportunities can pay off.
"We do not believe we are at the start of a sustained global bear market," says Sanaphay. "However, political wrangling and uncertainty continue to dominate the headlines, and many asset prices are likely to see increased volatility."
"Citi strategists are forecasting a reasonable 7 per cent gain in global equities to mid-2017, with equities and commodities being cross-asset outperformers through this period," Sanaphay notes. He says Citi analysts believe selected sectors may outperform broad equity indices, including energy, technology and healthcare.
Streater says Citi offers global access and exposure to these sectors, through managed funds or structured products. "Depending on your investment goals, we can develop a structured product to suit your view on a particular market."
Factor in the costs of entry and exit
For many investors, a choice between shares and property ultimately comes down to how much debt they are prepared to carry. Property has a much higher cost of entry, and ongoing property management fees, maintenance and insurance all add to overall cost of investment.
Shares may be more accessible than property, but it’s important to time the market. And ultimately, any investment decision starts with your investment goals and appetite for risk. Weigh up potential capital growth (or loss) against income return, and take the time to research and choose quality investments across a range of different asset classes.
Any advice is general advice only. It was prepared without taking into account your objectives, financial situation, or needs. You should consider if this advice is appropriate for your situation. We recommend you read the Product Disclosure Statement (PDS) or Terms and Conditions, available online or via a Citibank branch, in addition to seeking independent legal, financial and taxation advice on your personal circumstances before acting on the information contained in this material.
This material is for general information only. All opinions are subject to change without notice. This material is taken from sources which are believed to be accurate, however Citibank accepts no liability of any kind to any person who relies on the information in it.
Investments are not deposits or other obligations of, guaranteed, or insured by Citibank N.A., Citigroup Inc., or any of their affiliates or subsidiaries, or by any local government or insurance agency, and are subject to investment risks, including the possible loss of the principal amount invested. Investments are subject to risk, including loss of income and principal. Past performance is not an indicator of future performance. Due to exchange rate fluctuations, you risk losing capital if you invest in foreign currency. Some products are not available to US persons and may not be available in all jurisdictions.