Property vs shares

Danny asks: If I have R1-million to invest, is better to invest in property or shares?

Maya replies: This is a difficult question to answer because it requires a crystal ball to know how each will perform! One should rather make a decision based on what these different asset classes provide.

Listed property
Listed property is a portfolio of commercial properties such as shopping centres, warehouses and offices that are owned by a management company that is listed on the stock exchange.

Listed property is very attractive to someone who is looking for income from their investments as it pays rental income.

The yield (the income as a percentage of the share price) on listed property is around 8% currently, before tax. The share price of the listed property can fluctuate. However, if you are only worried about the income you can ignore the short-term price movements. Just be aware that the income is taxable. Listed property has outperformed the equity market over the last 10 years; however, that has been during a period of falling interest rates. If we saw an increase in inflation and interest rates, that would have a negative effect on the price of listed property shares.

Residential property
You can build up a good retirement fund using residential property. You would be able to use your R1-million to put deposits down on five or six properties and rent them out. By the time you retire your mortgages would be paid off or close to paid off and you would have a steady income stream. The downside is that you have to manage tenants; however, there are certain insurances you can put in place. You also cannot liquidate (sell) your investment quickly so you need to know that this is money you will never need in a hurry. You also need to make sure you keep money aside in case interest rates go up, increasing your mortgage repayments as well as money for maintenance and repairs. Visit www.hope.co.za for more information.

Shares
Over the long-term, equities are the best-performing asset class but it is also the most volatile in that share prices can fall significantly in the short-term. This should only be considered for a long-term investment of at least five years, but preferably 10 years. You will also receive dividend income from shares which at this stage is tax-free.

Many people build up a portfolio of high quality shares which then provide a tax-free income in retirement through the payment of dividend income. The price at which you buy shares plays an important role in your total return. Fund managers believe that the market is fairly valued at the moment which means it is neither expensive nor cheap. Fund managers are expecting returns of about 10% to 12% per year from the share market over the next five years.

Probably the best strategy is to have a well-diversified portfolio with exposure to shares and listed property both locally and offshore.

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