NCB report Property Vs. Equities

Brendan Burgess

Brendan Burgess

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NCB has today published a report comparing equities to residential property. Here are some points from a very detailed report:

To find the full report, click on [broken link removed]. Click on Investment Strategy on the right hand side of the page and it is the first report.

Code: 
Real growth in values from 1976 to April 2004

Dublin Property         * * * * 386%    5.81% per annum
National Property               255%* * * * 4.62%
Irish Equities                  652%* * * * 7.47%

Real growth in Earnings from 11/89 to 5/04

Rental Income nationally* * * * 12%* * * * 0.78%
Earnings yield on shares* * * * 98%* * * * 4.83%
We estimate that the entry price/earnings multiple for investing in Irish residential property is currently in the region of 38 times the initial earnings level. This compares with an entry mutiple of under 14 times when looking at a diversified portfolio of Irish equities on an equivalent basis.

For residential property to offer an adequate risk premium over the risk free prospective return from an inflation protected Government bond, we estimate that rents would need to grow from current levels at a rate equal to inflation plus 2.3% over the long term. For prospective returns on property to match those from a diversified portfolio of Irish equities, we estimate that long run rental growth would have to equal inflation plus about 4% per annum from this point forward. Historic data suggests that rental growth has fallen well short of each of these benchmarks despite the buoyancy of the economy.

We have compared the property and equity alternatives on the basis of risk and we conclude that it would be difficult to justify a lower prospective return on property on grounds of lower risk.

Capital appreciation in the Irish equity market has been underpinned by earnings growth and the current price/earnings ratio is within its historic range. Capital appreciation in respect of Irish residential property has been very significantly in excess of rental growth and the price/earnings multiple continues to explore new and unprecedented highs.
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It's a very interesting and detailed report. It's basic assumption is:

... if is it accepted that property is no different to any other type of equity investment, then sustained and consistent capital appreciation in excess of inflation can only be justified if it goes hand in hand with sustained and consistent growth in net rental income in excess of inflation.
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I don't think that we can accept that residential property is no differerent to any other type of equity investment. The main impact on the price of residential property is the demand for homes, not the demand for investments. True, the increased prices of residential property have not been justified by the increases in rents. But they have been justified by the increased demand of a wealthier population for new homes and their relative affordability in times of low nominal interest rates.

It's a bit like saying that works of art should not have increased in value over the centuries because their earnings have not increased. It's not their earnings capacity which determines their value.

Brendan
 
Property versus equities

I haven't read the report.

In the long term, rents cannot grow by more than earnings, as there is a limit to what tenants can pay. It would seem to me that it is quite reasonable therefore for property returns to be in excess of price inflation.

The same logic applies to equities: it seems reasonable that equity returns will also keep pace with earnings (or more precisely total wealth, probably GNP) rather than price inflation. So I cannot see any justification for the often-heard argument that property will outperform equities.

d
 
Report

The price of residential property is determined by two main factors:
The demand for homes by people who want to live in them
The demand by investors

Investors are really piggybacking on the price as set by the demand for homes. Looking at property as a discounted cash flow investment, the current prices cannot be justified. In other words, the present value of future rental income discounted at the interest rate gives a net negative value.

So investors are taking a gamble that the demand for homes will continue to push up the prices of residential properties. They are investing for capital gain rather than rental income.



A1
 
Re: Report

There is a fundamental error here...

..one has to take into account the risks associated in property v's equities. Yes the yields on shares have outperformed property - but these are the yields one can make money on as long as they have invested in the right equities. Perhaps in 10 yrs time when this is measured again, equities may still out perform property - but try telling that so someone who has lost money on investing in the wrong shares. Real estate does continue to increase in value overtime - so the 'expectation' is that this trend will continue - the population is growing - people need a place to live & this is where property investors can benefit.
 
Re: Report

Ninsanga

It's much easier to make these errors in property than shares.

Most people who invest in shares buy a diversified portfolio. If you have ten shares, you are very well diversified. Your portfolio return will be very close to the overall market.

Most people who invest in property can only buy one or two properties. They are very exposed to individual risk:
They overpay for the one property
They get a long term bad tenant
The area develops problems.

Property is much riskier than people realise and the great returns on property in the past few years have blinded people to the real risks.

Brendan
 
Re: Report

Brendan,
Each investment type carries its own risk - no dispute there.

An informed property investor & an informed equities investor will both most likely do well. Both will have researched & accessed their ventures in advance so the risks are somewhat reduced.

However my belief is that as the level of 'expertise' decreases then the equities investor is most likely to lose out alot quicker..

A property investor 'should' be looking to yield in the long term due to the substantial outlays in order to get started. The property investor is not looking to offload in the next 12 months or so.

The very minute shares are bought they may just drop in value due to the bid v's ask spread. So - does the novice investor know when to call it a day when the share price starts to tumble - do they hold on hoping that it will turn for the better but in the meantime the share price just tanks out.

ninsaga
 
Re: Report

Ninsanga

The very opposite is true of most of your arguments!

However my belief is that as the level of 'expertise' decreases then the equities investor is most likely to lose out alot quicker..
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The stockmarket is efficient to all intents and purposes. The property market is very inefficient. If I decide to buy shares in AIB, my research will simply not matter. The price is decided by the analysts in the various stockbrokers and institutions around town. If I want to buy no. 27 Back Lane, I have very little reference for that price. I may well pay way over the odds for it, because I don't know as much about property as I thought I did.

The very minute shares are bought they may just drop in value due to the bid v's ask spread.
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Not technically correct in the Irish market, but the principle is correct. If I buy shares in AIB today, I will pay 1% stamp duty and 1% commission. If I sell them tomorrow, I will pay 1% commission. That is a round trip cost of 3% which is huge and very difficult to overcome. But if I buy a property, I will pay 9% stamp duty and around 3% in other buying and selling costs between solicitors and estate agents and furnishing. So, the property drops immediately in value by 12% compared to 3% for equities.

Brendan
 
Let's get the perspective right. Houses in Ireland are not generally purchased as an investment, simply because of the poor liquidity in the marketplace and disruption factors. I am deaf from buyers that spout off about their 'gain' whilst having no intention of selling. Ergo, no gain. Shares, bonds, metals, warrants, options, etc. all benefit from active international markets. It is completely sound to lock-in a gain anywhere along the upward curve (duh!). And live to play another day. This scenario (the only scenario in investing/gambling) is not easily achieved with a portfolio of housing, especially if the one owned is a primary residence.<!--EZCODE BR START--><!--EZCODE BR END--><!--EZCODE BR START--><!--EZCODE BR END-->In the sideways market that we have seen over the past eight months, it is perfectly reasonable to actively manage a portfolio (excluding on-shore, as Brendan observed) for a 8 - 10% return. To European nationals, Luxembourg offers trading at discount prices and internet access. Yes, the Exchequer is still there with it's hand out in October and December, but 20%?!? Beats the punishing 42% belt (oops, band), <pun> hands down </pun>.<!--EZCODE BR START--><!--EZCODE BR END--><!--EZCODE BR START--><!--EZCODE BR END-->Alternatively most Irish mutual funds permit unlimited free transfers between products and cash, thereby affording an opportunity to indulge in a bit of ½ to ¾% weekly gains. Over a year, ½% biweekly gains (excluding a well deserved four week holiers) boosts your account an annual 12%.
 
Burned by Tipster

Last Dec, I came across some advice by a columnist in the financial supplement in a prominent Irish Sunday newspaper - that the shares being held by shareholders of a major Irish financial institution should be sold off. So I acted on that - only to find that the current value of shares of that institution is on the increase. If I had timed the sale to now, I'd be E2K better off.... I rue the day when I read that darned newspaper!
Fumed Shareholder
 
Sorry about that, fumed. But what most 'punters' (not the hardcore investors that haunt this board) do not get is that there are many forces against the retail investor. Time to make things work for you, eh? Think about the number of 'shorted' shares of either publicly traded (by this I mean listed outside othe Auld Sod) Irish banks owed by speculators (aka 'open interest'). Then, mix with a solid earnings announcement, a bit of ECB laissez faire, a dash of options expirations, and a good measure of cash in mutual funds. Taste and season by increasing dividends. Delicious!<!--EZCODE BR START--><!--EZCODE BR END--><!--EZCODE BR START--><!--EZCODE BR END-->Here's the tip.<!--EZCODE BR START--><!--EZCODE BR END--><!--EZCODE BR START--><!--EZCODE BR END-->Get informed about these ingredients before you buy or sell. Too much of one or too little of another and the thing can become a dog's dinner. Personally, I find the to the major quarterly earnings announcements a great buy opportunity coupled with selling at the close before the news (buy on rumour and sell on news). This one was bought at €1.50 (yeah, I broke my rule, but hols fell during the 'buy' window) and sold at €1.81 (20% gain in 6 weeks). Look at the tight trading on the 5 day chart. Shorters buying in an attempt to cover their exposure. But a word of caution here, when you place your buy orders, simultanteously place stop loss and a limit orders. So if either your pain or greed thresholds are reached, you are gold.<!--EZCODE BR START--><!--EZCODE BR END--><!--EZCODE BR START--><!--EZCODE BR END-->But then, I am a guerrilla investor. WTF, CGT is the same, short or long!
 
A Modest Proposal

I'm skeptical.
As of Friday' the go anywhere,use loads of leverage masters of the universe( the hedge funds) are up on average 2% this year(see Friday's FT), but you're going to make 12%.
Here's what I suggest. I will lend you 100,000 euros. You guarantee me 6% over one year plus safe return of my capital and you can keep the other 6% or what ever you make. You can use your house as collateral.
Sounds like a winner for both of us.
What say you?
Tyoung
 
Sure! Will you agree to pay all the CGT owed on the year's gains (it might just eat into your capital). In other threads on this board I have been critised for believing everything I read in the Indo (data from the CSO, DKM Consultants (Davy's), and Goodbody's). Here comes a post that quotes pinkie as saying X. The Fantasy Financial competition in the SBP that ran June to this month saw 5 retail investors with 200 to 250% gains.<!--EZCODE BR START--><!--EZCODE BR END--><!--EZCODE BR START--><!--EZCODE BR END-->fumed was upset about leaving some money on the table (after what I presume was a sale to the good). How will you feel when your 6k is paid in the 3rd week but the capital remains out of your control for another 49 weeks? Just asking that the envy factor be considered.
 
Hi Max

Askaboutmoney is a serious forum. I will delete all further rubbish posts from you. If you want to talk rubbish, there are loads of other places on the net that would really appreciate your style. It's wasted on us.

Please acquaint yourself with the Posting Guidelines:

No discussion of individual shares
No defamatory posts.
And no discussion of editorial decisions - especially with unregistered users.

Thanks

Brendan
 
Hear, hear... (ho-hum...)

So — back to the point..?

Hopper had one good point — about people believing that they're sitting on a 200%/300% "gain" on their property investment without taking into account (a) that the "gain" is gross, not net, (b) that valuations (and their own convictions) aren't worth a rat's a*se until and unless they're translated into a concrete transaction — no pun intended! ;) — and (c) that rental incomes look set to continue their sorry slide...

I'm no expert, and am just going on pure "gut" cynicism here —but if I were to be in a position to sink a hundred grand or so into an mid/long-term "investment vehicle", I'd be hard pressed to decide who to believe on this issue (i.e. property vs. equity). Good thing I'm not! :rollin

Next..?

Dr. M.
 
This thread is for discussing property vs. equities.

All rubbish and irrelevant posts will be deleted without further comment.

When the Suggestions Forum is opened, contributors can discuss editorial policy.

Brendan
 
Property V Stocks

Max Hopper
No offense intended. Good Luck with your trading.
On the actual discussion itself, I think Dr Moriarty has a good point.
Certainly residential property looks expensive and I do'nt think a rational investor can put fresh money there.
The 10 year Irish govt. bond now yields under 4%. Unless you believe we headed for a deflationary depression this hardly represents the investment opportunity of a lifetime.
For a number of years I have believed that the Irish stock market was undervalued. It never really got caught up in the 90's bubble and with the arrival of the Euro many Irish fund managers sold their Irish stocks to diversify into other euro holdings. However these stocks have had a good run over the last 18 months or so. While they are not expensive it's hard to make the case that they represent a great buying opportunity.
Furthermore stocks will be greatly influenced by global markets and in this area I'm very cautious.
That justs leaves cash or gold. I haven't yet bought the gold-bug's argument so for the last 9 months or so I have been accumulating cash and accelerating payments on my mortgage.
Best wishes
Tyoung
 
Property V Stocks

I can see that one of the biggest attractions of property over equities has not been addressed on this post.

As an ordinary punter I can obtain property using funds I dont have (93% or so).
I can rent out that property, and while I would have to subsidise the repayments initially, the rental yield will eventually surpass the repayments.

I will then have no outlay and repeat the whole process to fund another property.



To make the same return on equities, I need the lump sum up front.
 
Re: Property V Stocks

Hi Dan,
To make the same return on equities, I need the lump sum up front.
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You could get into hedge funds or spreadbetting (?).

Sluice
 
Re: Property V Stocks

Holy Burgess! Spreadbetting?

Even with spreadbetting you need to have the full amount available on deposit, hence you do need lump sum.

I'm a bit ignorant on the hedge funds though!
 
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