Real Estate seems to have emerged as a popular alternative to Stock Market investment over the last few years. A considerable number of stock market investors have been seen migrating their investments to real-estate considering it to be a safe haven. The most common perception driving this trend is the assumption that Real Estate involves less risk and is comparatively less volatile, however, the same may not be 100% true under all circumstances.
There are quite a few factors that most of us generally overlook before taking that plunge following the sentiments of some of our friends and family who have either invested or are planning to invest in property. Most of us get persuaded by the robust marketing tactics adopted by the Real Estate industry highlighting it as a safer investment and hiding the risks.
The First Risk factor is Flexibility while liquidating. To understand this, we simply need to ask yourself one basic question “What will you do if the Property prices start falling?” The answer definitely isn’t that you sell it off as that opens the Pandora box of another set of questions, the answers for which may be complex and need to be considered. Majority of these questions come to your mind even when the stock prices fall and you decide to liquidate your investment – “Are you recovering 100% of the investment you originally made?” Let’s assume the answer to this question is yes and you know that the prices may go down further so you are firm on your decision, the next areas of uncertainty may very well be “How quickly can you sell the property?”; “How will a Real-Estate Agent manage your transaction?”; “Will you find a client to buy your property especially during such period of uncertainty?” Now let’s compare answers to these questions when the same situation arises in the stock market. On an average it may take 70 days for you to sell property. In comparison, most listed shares (particularly blue-chip shares) are highly liquid and can be sold for cash within a few days. You may face an unexpected life event which requires you to access cash at a short notice and having all your investments in property can be an issue. This can get aggravated further if the property has a high loan to value ratio in a falling house price scenario as banks are unlikely to lend more money against that property. Now, whether it is due to an unplanned need for cash, or you simply want to rapidly de-risk your investment portfolio during a market downturn – listed shares tend to have substantially less liquidity risk than a direct investment in real estate.
The Second Risk Factor is Concentrated Investment Risk. To understand this there’s a very famous idiom - “Don’t put all your eggs in one basket?” Most of us would prefer investing in properties in the city where we live. So, for example, if you live in Melbourne, it’s quite likely that you work there as well and you invest in 1-2 properties in the same city or suburb where you live. This exposes you completely to the performance of the Melbourne economy. So, if the city suffers greatly during a financial meltdown not only will it have an impact on your regular employment income but you will also loose significantly on your investment properties. In contrary, you may have invested in a handful of shares leading to diversification and with many large companies having operations spread across Australia or even globally with multiple revenue sources, this risk gets mitigated.
Having read through the article, we are sure your will be able to take an informed decision that best suits your needs. It would always be wise to split your investment across both the domains. You may calculate the split ratio basis your risk preferences.
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