One of the biggest investment mistakes you can make is to chase after yesterday’s winners.
Sometimes when a class of asset or a share has done very well, the opportunity is so well known that the price is driven too high by speculation. When valuations become stretched, there’s a lot of downside pressure for the price too revert to more affordable levels. So, if you are late to the party, you could find your investment doesn’t work out very well.
The affordability problem
I think we’ve seen that situation with two well-known classes of asset recently. Cryptocurrencies such as Bitcoin looked like they peaked in an unsustainable speculative bubble during 2017, and property prices enjoyed a massive bull run over the past two decades or so.
The trouble with high property prices today is that they are less affordable compared to the average wage than they were 20-odd years ago. We used to see property prices cycling up and down, but we haven’t seen much downwards action for many years and I reckon something has to give.
To restore the affordability of property, either property prices must fall or average earnings must rise while property prices remain static. If either scenario plays out, the outlook for buy-to-let property is far less attractive than it was 10 or 20 years ago. Apart from that unappealing backdrop, the government has been changing the tax regime surrounding buy-to-let to make buying and renting out a property less attractive.
There are such a lot of costs involved in buying and selling property that the risks of getting involved don’t seem worth the potential rewards, at least to my eyes. Instead, I think there’s a big opportunity to invest in property-owning companies on the stock market.
Four compelling reasons to like property shares
There are several great things about investing in property company shares instead of directly into property. Firstly, you get instant diversification because the underlying company will likely own many properties. Diversification is hard to achieve with buy-to-let and you would likely have all your investment tied up in one building.
Secondly, you will enjoy a lot of liquidity with your investment, meaning you can easily buy and sell the shares whenever you like. With buy-to-let, it can take months to get in and out of property, and it can be an expensive process too.
Thirdly, the property company behind your shares can buy and sell properties in its portfolio to make sure it’s always operating in the most lucrative areas of the property market.
Fourthly, you’ll enjoy a regular, hassle-free dividend from your investment as well as the potential for share price rises because of operational progress and changing underlying property valuations.
To me, owning property company shares beats owning a physical property hands down. And with the stock market looking depressed right now, I think property company shares look like an attractive investment opportunity.