Property vs. Shares for SMSF’s.

A question often debated at dinner parties or at BBQ's is whether it is better to invest in property or in shares. One year the answer is shares, the next it's property. When the share market is strong it is the flavour of the month, supported by the hype of the media so everyone is keen to invest in shares, but when the share market is down (as we have just seen with the Global Financial Crisis), everyone wants to get out of shares. The same can be said for the ups and downs of the property market, when the market is hot everyone wants to buy and when it slows everyone becomes a seller.

Let’s look at both more closely. With the share market, as we have seen recently with the GFC, the value of the share market can be driven by the sentiment of the market and the hype of the media along with the liquidity of the market. Because people can trade their shares instantly when the market sentiment becomes nervous, many people sell and invest in cash or fixed interest securities, with the intention to re-invest when the market turns. If it was this simple and easy to pick when to do this, why would the fund managers not do this themselves and have averted the significant losses recently reported in their portfolios? The reason is it is not this easy and even the experts who do this for a living get it wrong, sometimes.

Property on the other hand is less volatile and the asset is not as easy to move in and out of based on the sentiment of the market. People who buy property tend to invest for the medium to long term, so the fluctuations in the market are really only felt if you are forced to sell. Those people that buy and hold do not feel the effects of the downturns.

Property can have the added advantage over shares in that it generally has a much higher ability to be leveraged as opposed to shares and with property you do not suffer margin calls from the bank when the value drops unlike shares which are felt instantly. With the ability to now borrow up to 70% against a property via an instalment warrant this means that property has become a much more attractive proposition for trustees of SMSF who are looking for less day to day volatility within their investment portfolio. With lending ratios at this level, most property that is purchased would be in a neutral or positive cash flow position from day one, which means that once you purchase the property there is no ongoing out of pocket expenses because the rent and your super contributions cover the loan repayment and ongoing costs of the property. The fundamentals in achieving a good balance are to be conservative in the asset allocation and level of gearing.

Property is a great way to reduce volatility in an investment base and for many people property is a much more comfortable investment as they understand the fundamentals of property much more than that of shares. In addition, property can add diversification to an investment base and acts as a great risk minimisation too; therefore a combination of both investments in shares and in property has a lot of merit. If there are sufficient funds in the SMSF the asset could consist of investment property, or properties, as well as shares to achieve liquidity within your SMSF.

Using an Instalment Warrant, SMSFs can borrow to acquire assets, such as property and shares.  With market values low, but showing signs of improving on a daily basis, this is a good time to consider investing in property.