A question many active investors ask themselves is what asset class they should be investing in, whether it should be stocks/shares or property and whether they should be restructuring the ratio within their overall asset portfolio.
There are a few major reasons why (as you can see by the graph below) statistically, property has outperformed shares in the long term.
Firstly, and perhaps the most important reason, is that property can be leveraged. Although you can leverage with stock and shares to an extent, the interest rates are far higher and it is much riskier due to factors such as margin calls – if the fund drops below a certain level you have to sell or inject more capital. The majority of funds are not leveraged for this reason and as can be seen above, leveraged property far outperforms the FTSE.
The graph also highlights the advantage of leveraging to a prudent level. With cash bought property, over a 20-year period (1997-2017) the value of your capital would have risen by around 225%. 50% leveraged property would have returned 480% approx. and 75% leveraged property would have far outperformed either, with around 950% in 20 years. In general, 75% LTV is considered the “sweet spot” within the property industry. Any lower and you are not fully taking advantage of leverage whereas any higher, the interest rates start to spike, and it is not usually economically binding.
Stocks and Shares are also more volatile to economic and political instability. During the 08 Financial crash, property dropped by under 20%, whereas the FTSE dropped by up to 60%. The consistent demand and need for bricks and mortar means that property will be a strong and stable investment over the long term, even considering economic downturn. This is particularly topical at the moment, with a lot of uncertainty due to Brexit. However, certain areas such as Manchester, Birmingham and Liverpool continue to grow and perform strongly since it was announced almost 3 years ago.