Shares vs UK Property - Which is the Better Investment?

I wanted to share some research I've done comparing the UK property market versus shares as investment propositions. As always you can download the article here if you prefer to read it in pdf.

Jump to:
1. Introduction
2. Where to get the data
3. The results
4. The big caveat when investing in equities
5. Conclusion

Summary of article

• Investing in equities (shares of companies) is a more lucrative long-term investment than investing in properties.
• Most individual equities do not give better performance than individual property, and therefore investing in equities needs to be done with great care.

Introduction

One of the lesser known historical facts is that investing in equities (shares in publicly listed companies) as a whole give better financial performance than investing in property. At least this is true in the UK where I live. I am not against anyone owning their own home and I think there are very good reasons for doing so e.g.

·         A place you can live and have security of shelter,

·         Freedom to do with the property as you like and change it whenever you want.

However, apart from your first home for the purpose of living, investing in property in general is not a better investment proposition than investing in equities if you are a long-term investor, which you should be. In this article I’m going to share with you the data that concludes this. By the way, all of the data shown here is freely available so you can have a look for yourself. I’ve also created a spreadsheet where you can take into account your own situation to see which of the two investment options is better for you.

Where to get the data?

The historical data for house prices can be found and downloaded for free from the Nationwide website; their website boasts ‘we have the longest unbroken run of house price data, stretching back to 1952 on a quarterly basis and 1991 on a monthly basis’.
For share price data, this can be found from many places when it comes to recent history. However, for long term historical data, this can be more difficult. In this article, I’ve relied on the good and free data provided by Yahoo Finance and Investing.com. Click

• here for UK FTSE All-Share
• here for UK FTSE All-Shares Total Returns
• here for S&P,
• here for S&P Total Return

The results

So how do shares compare to house prices? I’ll start off by sharing just the price increases from these two investment options going as far back as I can.

UK FTSE All Shares vs UK Property 

As you can see, from the 1990s shares have done better than property until the 2000s (i.e. the dot.com bubble) where the inflated shares came to more reasonable prices. Since then, property has done better than shares consistently. Perhaps this is one of the reasons why so many UK investors like the property market for their investing needs.

The graph shown here is actually is not surprising when it comes to the UK equities market. Killick & Co did a very nice video presentation, where they showed that over 1971 to 2014, share prices only increased by 18 times where as property prices increased by 31 times in the same period.

So what on earth is the basis for the fuss made by equity holders?

The answer is quite simple; if you take into account the total returns made in the stock market i.e. the returns made by dividends reinvested, equities beat property, even when you take into account the total returns made by property.  See for yourself:

UK FTSE All Shares Total Return vs UK Propery

With this graph, I have assumed the property(ies) purchased by the investor yields a continuously adjusted 5% rental income. Moreover, I’ve also assumed there is no void periods or maintenance costs.

In the Killick & Co presentation, if the total returns were taken into account for shares over the same 1971 to 2014 period, shares would have yielded an increase of 108 times – that is AMAZING! Reinvesting your dividends turbo-charges your portfolio!

If you picked a much better index to follow e.g. the S&P, then your returns will be even greater:

S&P Total Returns vs UK Property

With the S&P total returns, the only way property would match the S&P total returns is if property has an annual rental yield of 18% - which is of course not credible.

The Big Caveat when Investing in Shares

So equities as a whole outperform property, and by the way also this also includes bonds, cash and gold, however, most individual companies do not. This has been reported in several research studies but can also be easily rationalised and understood when we consider the countless number of companies that go bust or whose businesses are deteriorating over time. Academics have also shown for example, that although the S&P outperforms US Treasury bills as a whole, still “Four out of every sevencommon stocks that have appeared … since 1926 have returns less than one-month Treasuries.” . This means 57% of stocks in the stock market have poor returns!

The reason the equity index beat US Treasuries while most of the stocks in them do not is really quite simple. Large positive returns from the fewer and performing stocks offset the modest or negative returns from the majority of stocks.

So, the conclusion is individual property investment are probably much safer than individual share investment. Given this rather damning prospect, you only have three choices if you want to invest in equities:

1. Work hard to ensure you carefully select the best companies in your portfolio.
2. Contract out #1 to a good manager with a good proven long-term track-record. Of course, this comes with the expense of the management fee, which in good funds shouldn’t hurt your gains significantly.
3. Or, buy an appropriate index fund. 

Conclusion

I’m in favour of owning your own home, that is a great idea! But as an investment idea against equities, it is not the brightest idea.

The total returns from equities is much higher than the total returns from property for the long-term investor. There is a very simple reason why good equities outperform property; equities automatically reinvest a portion of their profits/earnings back into the business to generate more future income. For property, not only this is not done automatically, but there is only so much one can do to reinvest the rental income back into the property to command a higher rental income. The exercise can quickly become saturated with property.

Having said that, it isn’t all bright and fantastic with equities, as most individual companies do not have better prospects than property. Therefore, one needs to be very careful when investing in equities.

Author

Wahid Azizi (wahid.azizi@azizifund.com)

AziziFund CEO

As always, please remember this is not advertisement for AziziFund or financial advice.