Friday, December 28, 2007

Property or Equities?

According to some research in the United States, 90% of US traders lost their money. In Malaysia, there are no such statistics to indicate how many retailers who traded in Bursa Malaysia suffered the same fate. The situation in Malaysia may not be as bad but the percentage of losers is definitely not far from 90%.

More people make from property
On the other hand, more than 90% of property investors make money in Malaysia, except for those unfortunate ones who fall prey to defunct developers or bought properties in the wrong locations like Bukit Beruntung.
From the above observations, does it mean that property is a far better investment? Some people reckon so, while others still cannot resist the attraction of potential large capital gain provided by the stock market; after all, two of the richest men in the world, Warren Buffett and George Soros, make their fortune from the equities market.
In the above comparison between investing in stocks and properties, it is the traders who lost money but equities investors should make money in the long run. Unfortunately, most Malaysians who invest in both asset classes seem to think that they make more money from the property market than from the stock market.

Both are attractive
Property and equities investments are both attractive and could be highly profitable too. That is possible provided one has the right approach and strategy.
There are many people who make huge amounts of money from both these investments. Many of the world's richest men made their fortune by investing in properties or shares or both.
Doubling your investment by investing in the property or stock market is not a dream, and the capital required is within the means of most individuals. But those in the market can tell you that these two classes of investment are quite different.

Return — property vs share
How did property investment perform in the past? Unlike the stock market, there is no property index that can provide a clear indication of the long-term performance of property investment in Malaysia.
A simple comparison of double-storey houses in a few prime locations in Kuala Lumpur (Table 1) seems to indicate that the capital gains of these properties were about 6.2% - 6.9% over the past 16 years. The gains, however, do not include rental incomes which can yield another 3% per annum. As such, the total average return of these superb investments was about 9% per annum, which is pretty attractive.
Bear in mind, these are prime properties. The second-tier properties will have lower return, for example those in Ipoh, Seremban, etc. Over the same period, the best property stock, IOI Properties, gained 19.9% per annum. However, there were also many property stocks which performed poorly.
If we use the stock market benchmark, the KL Composite Index (KLCI), the gain over the past 16 years was a mere 4.3% per annum. The poor performance of the KLCI over the past 16 years could be due to the financial crisis in 1997/98, which affected the stock market much more than the property market.
On the other hand, if we look at a longer duration, say from 1978, the average compounded return of the KLCI was a more respectable 7.2% per annum. If we include dividend income, the return will be in the range of 9%-plus per year for an average Malaysian share.

Shares — better return, higher risk
The comparison indicates that the return of stock market investment was as good as that of property investment. In certain cases and during certain periods, it can be even better than property investment.
However, if risk is taken into consideration, the risk-adjusted return of property investment could be better than stock market investment given that the volatility of stock prices is very high whereas property prices are more stable.
Besides price performance, there are many other issues which need to be considered as well. Table 2 shows a comparison between these two asset classes. There are obvious advantages of investing in properties — stable prices, high gearing, a good collaterised asset, steady flow of incomes, etc. But there are also many disadvantages in property investment such as lumpy investment, not easily divisible, higher transaction cost, longer duration taken to complete a transaction, etc.
Those investing in the stock market would agree that investing in stocks and shares is so much easier and one can get in or out of the market fairly fast. Property proponents, on the other hand, find investing in the stock market too volatile. Their hearts could "go up and down with the stock market gyration every day".
Both are equally good
In fact, properties and stocks are equally good investment. The high leverage of property investment can provide good capital gain over time. The limited supply of well-located properties will ensure steady appreciation in value. The inefficiency in property market also provides many opportunities.
On the other hand, equities investment provides the liquidity and excitement. Shares are like quasi cash, whenever there is an urgent need for money one can sell some shares, but that is not possible in the case of property investment. Investing in good stocks can be very profitable and it does not lose out to investing in property market. There are many blue-chip investments which yield substantial capital gains over time. Genting, Public Bank, IOI Corporation are some of the familiar names around.
is no conflict between property and share investment as each of them provides good return and in fact they complement each other. Property can be kept as long-term investment while shares can be held as medium- to long-term investment.
By Ang Kok Heng

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