The Singapore property market has been creating alot of media coverage lately. Numerous advertisements in the major dailies have surfaced amidst the ‘buying frenzy’. In contrast, the talking point in the equities market has been over the sustainability of the rally. What are difference between property investment and equities (stocks) investment. Below is a brief discussion.
Lock In Purchase Price In Property Investment
The purchase price is locked-in once the investor signs on the dotted line in a property transaction. This can be a boon or a bane. If the purchase has been done at the bottom of the market, the returns could be lucrative. However, the opposite is true if the timing is wrong. Property investors who entered the market in 1997 are still suffering paper losses (not considering rental).
In the case of investing in equities, the purchase price can be spread over a long period using a Dollar-Cost-Averaging (DCA). Periodical purchase can be done over time. This reduces the risks of buying at the market high. Of course, the investor would not be able to buy at a lowest price either.
Ease of Leverage
Banks would readily dish out loans for property purchases as long as you meet the income and credit requirements. Typically, up to 5X leverage can be achieved for property, eg, a $1 mil property can be bought with a $200k down payment, the rest paid with a bank loan. Banks do not give out loans for you to buy stocks.
Buying stocks or funds do not give you leverage. Leverage in equities can be achieved through margin instruments like CFD, options, warrents and futures. However, a margin account (a sort of deposit) may have to be maintained and margin calls (top up the ‘deposit’) would result if the investment falls below a certain level.
There is no margin call for property investment as long as the loan is serviced.
Leverage is a double edged sword. Investors can get higher returns but also bigger losses. By getting loans for property purchases, the investor has to commit to monthly loan servicing. Problem arises when cash flow is interrupted (eg, loss of job, major illness treatment, business failure, legal liabilities). A forced sale by the banks may result if the loan payment stops. For investment in stocks, additional investments can be stopped anytime.
Diversification
It is not easy to diversify in property investments. If things go wrong with the development, a big amount of money is probability stuck there. Diversification can be easily achieve for stocks investment by using funds or ETFs.
Interest Rate Risk
Interest Rate changes affects property and equities in different ways. Monthly property loan servicing amount is dependent on the loan interest. For example, a 30 year $500k loan at 2.5% interest would require a monthly repayment of $1975. If the interest rate is 4%, monthly repayment is $2387. The difference in interest payment over 30 years is $148k!
For equities, increase in interest rates would lower stock prices and vice visa and not the monthly investment amount assuming a monthly DCA approach.
Liquidity Risk
Property investment are illiquid. It takes much longer and much more effort to sell a property compared to selling stocks or funds. To liquidate a property fast, the investor may need to sell at fire-sale prices. Selling stocks a fire-sale prices generally occurs only during market panics.
Currency Risk
A Singapore investor investing in properties in Singapore is not affected by currency risk.
As many listed companies have operations overseas, currency fluctuation would affect the bottom line and thus the share price. In addition, investors also face currency risk when investing in overseas companies either through funds or direct stock holdings.
Conclusion
There is probaility no answer to which is the better investment choice – properties or stocks. Investors would need to know the characteristics of it and make an informed decision. Following the crowd is definitely not the way to invest.
Source : Financial Planning Central – 23 August 2009
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