Property versus shares

A topic that often arises with clients in times of market volatility, is whether they should invest their money in stocks and shares or in property.

Often property is seen as a ‘safe option’ as it’s a tangible asset that we can see, touch and understand more easily than the abstractions of the stock markets.

However, an investment in property is still an investment. It is a distinct asset class with its own risks and rewards and we need to assess its suitability in the same way we would any other investment option.

Let’s look at the pros and cons of each to see how they compare.

Considerations before investing in property

The potential returns that can be generated from a property, either through capital growth, rental income, or both, will be specific to its location and the type of property itself, amongst other factors.

Investment could either take the form of a second home, to use and enjoy yourself, potentially renting out in vacant periods, or property purchased as a buy-to-let investment. For those fortunate enough to have a large investment portfolio already, investing in property can offer diversity as an asset class.

Property rental offers the potential to generate income that will not erode the capital value, although void rental periods can impact the income stream and maintenance costs can be unpredictable and would need to be budgeted for.

Landlords can use a managing agent to find tenants and oversee any issues for a fee of around 10% of the income but even with an agent, property letting can still be time-consuming and demanding for the owner.

Owning a buy-to-let property is not as tax-efficient as it once was because mortgage costs are currently only subject to basic-rate tax credits. Also, there is a 3% stamp duty surplus for a second property which can impact the ability to make a capital return. Capital gains on sale are subject to either 18% (basic) or 28% (higher) rate of tax and must be reported within 60 days of sale.

Professional landlords can potentially hold property in a limited company to improve the tax efficiency although this will add a layer of complexity that may be off-putting to some.

Property is an illiquid asset, meaning it cannot be quickly or easily converted into cash, which can be an issue when needing to access funds quickly or in part. This also makes estate planning and inheritance tax mitigation more difficult.

Property also lacks the powerful effect of cumulative returns that an investment portfolio can enjoy – returns on returns.

Considerations before investing in the markets

Turning to investing in the markets, analysis by Brewin Dolphin calculated that £100 invested in the stock market in 1986 would have accumulated a total of £1,755 by 2018, through a combination of capital gains and dividends. Meanwhile, that same sum invested in a buy-to-let property would have produced a return of £739, via a combination of capital growth and rental income.

In contrast to a property investment, an investment portfolio is more liquid, which means that funds, if needed, can be accessed quickly, and income varied as necessary. Income can be generated from capital growth, using the currently generous capital gains allowance and tax-efficient wrappers such as ISAs and pensions. Pensions have the obvious limitation of only being accessible after the age of 55 (increasing to 57 in 2028 and potentially further as state pension age increases).

The liquidity also means there are more options for estate planning, as an investment portfolio is simpler to gift in part. Furthermore, there are inheritance tax efficient products available for doing this.

An investment portfolio could be seen as less straightforward than investing in bricks and mortar and the markets are usually more volatile than property, which can be unnerving for investors, especially during a downturn.

Without the support and guidance of a professional financial adviser or asset manager when investing in the markets, emotional and behavioural biases can lead to poor decision-making and there is a real risk of taking too much income and eroding the portfolio more quickly than desirable. For these reasons, working with a professional is always advisable, but comes with the associated costs.

Holistic view

As with any investment decision, if you are considering investing in either the markets or property you should seek to take a holistic view of your circumstances when assessing your options. Depending on your position and your aims in life, you may benefit from the estate planning and income flexibility of an investment portfolio or those already with a significant investment portfolio may benefit from the diversifying effects of a rental property.

Working with a professional adviser to is the best way to ensure your investment strategy meets your financial objectives.

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and the value of investments can fall as well as rise. No representation is made that the stated results will be replicated.

Victoria Ross

Chartered Financial Planner

Victoria is a Chartered Financial Planner and a Fellow of the Personal Finance Society.

Learn more about Victoria Ross

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