Q&A

Ask an Advisor: At this stage of the cycle, is it better to put my money on shares or property?

9/14/2016


Lindiwe: I’m looking at investing in property at the moment. At this stage of the cycle, is it better to put my money on shares or property? I already own some shares but I don’t have investment property. Any do you advice on how I can get started with property investing? 

Advisor's Answer:


Jolene Bauermeister  - Certified Financial Planner ®

Market consensus is that we are still in a rising interest rate cycle, although opinion differs on how much interest rates could rise. Our economy is in a tight position and raising rates much higher could squeeze our economy to the point of collapse. On the other hand, we need to attract international investors by rewarding them sufficiently for investing in SA Inc. If the USA were to raise interest rates again, we may be forced to follow suit.

If rates go up, it means property prices have further downside potential.

If you are intending to purchase a property using financing, you may need to look at your budget to determine if a rise in interest rates is financially sustainable for you.

Investing in a REIT (Real Estate Investment Trust) is an alternative to buying residential property yourself. A REIT gives you exposure to a much more diverse property portfolio that could include residential, industrial and retail property.

A few of the benefits of owning a REIT over a residential property includes;
  • liquidity is generally not a problem if you wanted to get rid of this investment.
  • there are no maintenance costs to budget for or,
  • troublesome tenants to deal with.
  • Dividends are taxed at 15% whereas the income from your rental property is taxed at your marginal tax rate
If you still wanted to invest in a property I would highly recommend doing a yield calculation on the property you are interested in, to see if it warrants buying. Do take into consideration your rental fee increases and the historical escalation on the rates, taxes and levies when considering future profitability of your property, especially if your intention is to generate an income from it.

If your yield does not grow in line with inflation, it means your monthly income will suffer in the long term as you are not maintaining your purchasing power. In essence, you get poorer. I would do this calculation as well as an annualised return calculation every year or so.

As for investing in more shares, the risk inherent in investing 100% of your money in the stock market at this stage is very high.  i.e. of particular concern is Italy’s banking crisis and China’s shadow banking system.

I would advise that the most prudent strategy you can employ right now is to diversify your risk as much as possible. Certain Fixed Interest products offer quite a high yield with relatively low risk compared to the risk you would be taking on investing in shares. And as mentioned above, the potential for downside is much more than that for upside.

Your financial adviser should be able to help you in the right direction when deciding on how to spread your risk effectively.

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