Real estate vs. shares: what’s the difference?
Whether an investment in shares or real estate is more advantageous depends largely on the investor and their objectives. In the case of real estate, a wide variety of factors play a role, such as the location, the substance, the purchase price and the long-term development of the property. These and other factors should be taken into account when investing in real estate, just as when investing in shares. A good asset manager knows the advantages and disadvantages of different asset classes such as real estate and equities and can advise you individually depending on the market situation.
Both asset classes have their advantages and disadvantages, which are explained below.
Real estate
Real estate can be categorized into two main types: Commercial real estate and residential real estate. Real estate feels more real or tangible to many investors than other asset classes such as stocks. Making money with real estate is not a sure-fire success. For example, it is possible to buy a cheap property, renovate it and sell it on at a more expensive price. Another option is to rent out properties in order to generate a regular income.
Advantages of real estate
- The wear and tear of a commercial property can be depreciated. There are also other tax deductions that can be used.
- Home ownership: The monthly repayment of a loan may be lower or similar to the rent. In addition, there is no longer a direct rent increase.
Disadvantages of real estate
- High initial investment: Since the high initial investment cannot usually be paid out of one’s own pocket, real estate is financed by loans (mortgages), which reduces the potential income and thus the return.
- There are high ancillary costs that are often underestimated. Transaction costs such as taxes, notary fees, estate agent commissions and fees charged by the authorities are examples of such costs. A property also has ongoing high costs, such as maintenance and care, renovations and refurbishments, insurance premiums, various service contracts and costs for property management and letting.
- Another major disadvantage is that real estate is not very liquid. If money is urgently needed, the property cannot be sold overnight. In addition, there are usually additional costs when selling, such as commission and fees.
- Although property prices usually rise in the long term, this is not always the case, especially when inflation-adjustedproperty prices are analyzed. After decades of rising real estate prices, the last real estate crisis in Switzerland in the early 1990s has been forgotten. However, real estate crises can recur from time to time, as the financial crisis from 2007 to 2009 impressively demonstrated, which started with a real estate crisis in the USA and led to further real estate crises in Europe.
- Risks cannot be diversified (distributed) as easily as with shares. Diversification can be achieved by buying different properties in different locations. However, each property on its own can again represent a cluster risk.
Shares
By investing in shares, you acquire a small stake in a company. The risks are therefore closely linked to the company in question. In good times, the value of the company rises, while in bad times the value of the company falls. Influencing factors can be both internal and external (e.g. the financial crisis or corona crisis). The effects of external events can have both a negative and a positive impact on a company’s value, depending on their nature.
Advantages of shares
- A major advantage of investing in shares is that you can usually invest from a smaller sum compared to buying a property. This offers a certain flexibility in the investment amount and makes it easier to get started.
- Exchange-traded shares are usually very liquid. They are quick and easy to buy and sell.
- In addition, the risks of equities can be very well diversified with a well-balanced securities portfolio.
- Low running costs compared to real estate.
- Less high fees/taxes and charges compared to real estate.
Disadvantages of shares
- One disadvantage of shares is that you have a price on each trading day and this can be very volatile .
- The correct allocation of shares is a challenge.
- It is difficult to assess the true value of a company.
- Some sectors are more susceptible to crises than others.
- There is a confusingly large selection of shares.
It is therefore worth consulting an expert, such as an independent asset manager, especially when investing in individual securities.
REITS, ETFs and real estate funds as alternatives
A good compromise when deciding between investing in the stock market and investing in real estate can be the purchase of a REIT (Real Estate Investment Trust). This involves investing in a large real estate portfolio. This also provides diversification in real estate. Certain ETFs on real estate or traditional real estate funds also offer good opportunities for diversified investment in real estate, even with smaller sums. With real estate funds in particular, it should be noted that you sometimes pay a very high premium (surcharge on top of the value of the properties held). This means that you pay significantly more than the value of the real estate portfolio, often at times when the properties themselves are already highly valued. Such phenomena are typically observed during periods of low interest rates and require additional analysis. High real estate prices combined with a high premium represent a double risk. The financial crisis showed that it was also not easy to exit and sell open-ended real estate funds at the time of the crisis. Liquidation was only possible with high losses, as properties had to be sold at the wrong time. This is where the advice of a good, independent asset manager who analyzes and knows the various risks associated with real estate funds can be valuable.