Property has been a solid returner over the years. It will produce an income stream together with the prospect of capital growth.
Property types include residential, commercial, retail, industrial and rural. Each of these sectors is subject to different economic influences.
One of the clear advantages of property is the ability to use it as security for borrowing. Subject to certain conditions it is possible to borrow up to 90% of the value of a residential property.
Higher levels of debt can mean that the cash outgoings (rates, insurance, interest and principal payments) exceed the rental income - even assuming tenants are in place for the full 12 months. This situation does require some budgeting.
That a bank will lend so readily on residential property makes it a very effective starting point for many people looking to start building a retirement nest egg. Instead of having to save $400,000 to buy a property, the investor may only need between nothing and $40,000 to get started.
So, what are the facts. Property is indeed a growth asset. If you are renting (commercial, residential, industrial, retail) location, tenants, flexibility are all important issues. Returns have clearly exceeded fixed interest but over time but have failed to head off the share market.
The residential market is where investors generally start. $10,000 invested into the Nelson residential market in 1975 would have grown to $95,000 by the end of 1995.
Other centres include Dunedin $97,000, Invercargill $72,000, and Christchurch $101,000. These returns are dwarfed by the return from the New Zealand share market over the same time. $10,000 would have grown to $215,000.
Interestingly enough if the same money had been put into the world’s share markets it would have grown to $332,000 over the same period.
“But” will say the property heads, “buy a good property in a good location and watch the returns take off”. “The figures above are just averages” they will say. And there is indeed no doubt that a reasonable number of individuals have done extremely well from intelligent investment in the property market.
But the same applies to the share market and to a multitude of other business and investment areas. There are those whose wealth from investing in shares between 1975 and 1995 considerably exceeds the $332,000 suggested above as being available from the worlds share markets.
I like property. It's a legitimate investment with potentially good returns. But it has its own risks, and investors perception of the likely returns can be skewed.
