KEY POINTS:
The property market's spectacular run of capital growth is over for now and yields have been squashed by high prices and interest rates - but to many investors the local share market is a less-than-alluring alternative.
The newly released Russell/ASX report for 2008 has found Australian shares outperformed residential property and listed property trusts over the past two decades, giving the best returns for investors.
Australian shares returned 16.2 per cent after tax against 13.4 per cent for residential property at the lowest marginal rate, and 13.9 per cent compared with 12 per cent on property at the highest marginal tax rate.
Barry Lindsay, of First NZ Capital, has crunched the numbers to compare New Zealand's experience with that of Australia.
He found residential property performed marginally better than local shares over the past 20 years, with average returns of 6.8 and 6.5 per cent per annum respectively.
Lindsay concluded New Zealand shares "have not really delivered" over the past two decades when risks are taken into account. "Investors should receive a premium for the volatility or risk associated with shares," he says. "We see shares as offering potentially high long-term returns as the underlying businesses grow. But share prices are volatile over the short term."
But he says the share returns reflect the entire market, and not individual shares.
"The returns assume that investors receive market-only returns, whereas in most cases they don't. They select investments which may well have performed differently to the market indices. Some would have done considerably better than this, for example Fletcher Building."
The residential property returns are those measured by Quotable Value, showing changes in house prices but not income derived from rentals.
Lindsay says residential property has actually performed better than the returns shown in the table, as investment properties would have delivered income to supplement the capital growth.
There are pros and cons to each investment class, says Lindsay. Shares are liquid and can be readily sold if necessary.
Residential property will always be needed and investors can add value directly, while most shareholders cannot influence the fortunes of the companies they invest in. However, residential property is illiquid.
Property accountant Mark Withers says the real power of property is the leverage: "Banks are reluctant to lend against shares, while with property, typically you can control a large amount of money with a small deposit. When you express the returns as a percentage of what you've put in from your own money, they can be exceptional - nothing else really will ever beat it."
Another accountant, Matthew Gilligan, agrees property outperforms shares because of its leveraging advantages. Investors regularly borrow up to 80 per cent of the value of a property, but it's unusual to be able to borrow more than 50 per cent of the value of shares. "Factor this in, property beats shares hands down on the same analysis."
But Withers cautions that the power of leverage cuts both ways, and in a property market downturn "you can leverage yourself out of a fortune as well".
Bruce Sheppard, chairman of the Shareholders Association, says the key to profitable investing in any asset class is "taking responsibility for your own decisions - deciding on an investment plan, becoming financially literate enough to understand the issues, and executing it with intelligence".
He says: "If you are a good stock picker, your return on shares would be considerably better than property."
