“Once the figures are taken into account, it is clear that an investment in equities over the long term provides the highest yield,” said Vlok. “We saw that direct property prices experienced a boom period during 2002 - 2007, with an average annual return of 18.2%. And, began to show signs of slowing (2008 - 2016) by delivering an average return of 3.8%.”
|Investment Choice||1 year||3 years||5 years||10 years||15 years|
|SteFI Composite Index||7.37||6.58||6.09||7.31||7.94|
|FTSE / JSE All Share Index||2.63||6.16||12.97||10.50||14.79|
|RSA Residential Property||5.00||6.23||6.02||4.62||9.65|
“Equity investments, through a mutual fund or a tax-free savings account, seem to be a more convenient way to invest your funds and enjoy growth. The historical returns are attractive, it is a very liquid investment, is accessible, and the effort to invest is minimal. There are no unforeseen costs. And, your assets cannot be reclaimed through a financial institution. Do not write off property as an investment though, as leveraging the bank’s money to work for you is a very attractive strategy. This applies only if you do your homework, however.”
“Every South African knows that Cape Town property growth will be more attractive than property yields in smaller towns up-country. So, geographical location must be taken into account,” said Vlok.
“It is important to understand that the above figures exclude rental income,” said Vlok. "This component ensures, on average, 5 - 8% additional returns per year in rental yield. If the rental income is taken into account (at the lower limit of 5%), property falls into the same category of return as equities, over the long term (14.65% vs. 14.79%).”
“If high yields are the ambition, an investment in shares over the longer term, in the area of 7+ years, is warranted. So, the investment horizon of residential property is longer than equities, although both must be considered a long-term investment.” CLICK BELOW to read about how to save money by paying off your car.
“This aspect is particularly important in cases where your investment may have to serve as an emergency fund. Investments in shares are much more liquid than direct property. They are also only slightly less accessible than money market funds (compared by days to access funds),” said Vlok.
“This is a very attractive proposition, using the bank’s funds to build your wealth. However, provision must be made for factors such as unforeseen expenses, bad tenants, vacant property in the absence of tenants, and, most importantly, the interest rate you pay and any possible interest rate increases.”
“There are clear tax benefits in property. But, with the rise of tax-friendly investment vehicles, such as the tax-free savings accounts introduced in 2015, tax efficient solutions for equity investments are now more accessible.”
“It is assumed that the ownership of property gives you a sense of status. The possession of a physical asset means more to most individuals than simply the financial value attached to it,” noted Vlok. “Property may provide more personal satisfaction than an investment in the stock market. While emotional aspects may make property more attractive, it adds to the risks involved when investing in shares.” “Investors like to monitor the values of their investments and usually fall into a trap, driven by their own emotional biases. Some of these risks include selling shares when markets are down, which is the most important time to stay fully invested,” he concluded.