dividend fund v BTL

i know its against forum rules to specify any individual investments - companies but id like to make a general comparison and ask peoples views on such a comparison

im currently looking at a pound sterling based dividend fund which currently has a yield of 4.95% after fund expenses , the fund is comprised of fifty different uk based companies and trusts , obviously there is the matter of the fund being denominated in sterling

contrast this with an achievable 7% from investing in property in any of the cities in this country , granted you cannot get 7% in very expensive locations but demand is high in almost anywhere in the three major cities right now so a posh address is not a priority

when one considers the potential currency risk of sterling with the potential problems which accompany an investment in bricks and mortar , am i the only one who views a 4.95% NET income from an equity fund as being on a par with a 7% return on a BTL , were you to encounter a problem tenant which dragged out over a year , that 7% would be completely erased and the asset would most likely end up costing you money

i know there are many different variables involved but id like to hear peoples views

effectively what im asking is , what kind of premium do you need to be getting on property over equities in order to compensate for potential headaches which tend to accompany real estate

I have both and if i was starting again I would stick to equities. In my opinion you would need at least 10% net to make illiquid property worth holding and managing. I would also avoid funds and over time create my own mixed portfolio of directly held blue chips, which I would hold or trade depending on price movements.

The general consensus among the investment manages I deal with is that an equity portfolio will yield about 6% going forward.

If you you compare equity investing to a property then you need to realize that you have increased your risk on a number of dimensions:
- you have lost sector diversification
- you have lost geographical diversification
- you have lost diversification within the asset class
- you have reduced your liquidity options
All of this means that you'd need to be offered a very high risk premium to take it - say 10% - 14%

10 - 14% is incredibly rare when it comes to RE investment

i know most take into account total return but i prefer not to focus on capital appreciation , i know equities give the best total return over the very long term , im thinking about the annual income a sum of say 150 k will give if put to work , if you for example put it in a fund with a NET yield of 4.95% ( i cant name it but its uk based and blue chip large cap for the most part ) , you should see a gross income of 7425 before whatever income tax applies

if you purchased a two bed apartment for 150 k ( lets imagine a scenario where the property is bought entirely with cash ) and saw a monthly rental income of say 1000 euro ( 12 k per annum or 8 % gross yield ) , take a 1200 euro management fee deduction , property tax of 150 euro , insurance of 150 , maintenance - repair of say 750 euro and one months entire rent deducted due to potential vacancy or even non payment , thats 3250 off 12000 euro = 8750 rental income before income tax , gives you a NET yield before income tax of slightly less than 5.9%

im no expert but is the equity option not the easier and perhaps even more rewarding option using the above comparison ?

Operating as a landlord is a business, not directly comparable with investing in a fund.

You say that you prefer not to focus on capital appreciation, while the future is unknowable, the possibility for capital appreciation (or depreciation) is a significant element of any property investment. You cannot just ignore it because it is hard to get a handle on. It wont ignore you.

To respond to your question, what property yield would you need to compensate for the higher risks, as clearly outlined by Jim above, ( I would consider the illiquid nature of property a disadvantage rather than a risk. It is definitely illiquid). Well I would say that a view on the potential for capital appreciation makes that question redundant.

Property gives a reasonable yield with the potential for significant capital gain.

cremeegg said:

Operating as a landlord is a business, not directly comparable with investing in a fund.

You say that you prefer not to focus on capital appreciation, while the future is unknowable, the possibility for capital appreciation (or depreciation) is a significant element of any property investment. You cannot just ignore it because it is hard to get a handle on. It wont ignore you.

To respond to your question, what property yield would you need to compensate for the higher risks, as clearly outlined by Jim above, ( I would consider the illiquid nature of property a disadvantage rather than a risk. It is definitely illiquid). Well I would say that a view on the potential for capital appreciation makes that question redundant.

Property gives a reasonable yield with the potential for significant capital gain.

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Do equities not give a greater potential for capital gain ?

Agree with Cremegg that it is irrational to focus on one aspect of an asset's return.

However, there are a number of international studies that show that the real capital appreciation of residential real estate is essentially zero over the longer term.

A city centre apartment in Dublin that might have sold for ~£100k twenty years ago would probably sell for ~€200k today. Strip out inflation over the intervening period and the capital value has essentially gone nowhere.

As such, it does make some sense to focus on income alone when it comes to long-term real estate investing but the same logic does not apply to equities. A dividend-oriented equity investment approach is inferior to a total return approach IMO but each to his own.

Sarenco said:

However, there are a number of international studies that show that the real capital appreciation of residential real estate is essentially zero over the longer term.

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Yes I particularly like the Herrengracht one in Amsterdam which goes back to 44 BC or something like that ! Anyway a bit beyond my investment timescale.

The idea that the real capital appreciation of property is zero over the long term does not invalidate taking a view on the potential for capital gain or loss on a particular property, at a particular price, the opposite in fact. The property in Dublin you mention was probably going for €300k in 2006 and €120k in 2010, a strong view on the potential for capital appreciation could have been taken at either time.

Valuations certainly matter over the shorter term - no doubt about it.

I guess my point is that for a long-term (20 years+), buy and hold real estate investment it's probably reasonable to assume zero real capital appreciation (particularly if you allow for acquisition/disposal costs and capital expenses) and to focus on income as the more important element in the calculus.

Of course, yield and value are related - yields in general were hopeless in 2006 and pretty attractive by 2012.

Sarenco,

Can you support this view in the Irish context?

Let's say, what has house price inflation in Dublin been for each of the following periods?

Since 1956, 1966, 1976, 1986, 1996 - and what are the comparable inflation figures?

Sorry elacsaplau but I don't believe that sort of long term data exists for Irish property prices.

The CSO's RPPI only started in January 2005. The Department of the Environment has a housing index that goes back to 1970 that might help -

http://www.housing.gov.ie/sites/default/files/attachments/41c-price-sh-property-area-by_year_1.xlsx

The CSO obviously publishes historic (CPI) inflation figures -

[broken link removed]

Karl Deeter and others performed a partial study a few years ago that concluded that Dublin house prices in 1944 were lower in real terms than they were in 1744!

http://www.irishtimes.com/life-and-...0-years-of-property-booms-and-busts-1.2111375

Thanks Sarenco,

I forgot about Karl Deeter's study - I'll have to look into when I've more time.

My strong sense - and I'll try compile something but may take awhile - is that in relation to the timescales selected (20, 30, 40, 50 and 60 years), house prices in Dublin will have significantly out-paced priced inflation! Challenge laid down!! Further, I suspect that a similar story pertains in London, Edinburgh, Paris, Nice, etc. (i.e. places where people want to live!).

If anyone has research evidence - contradicting or supporting my hypothesis - in any similar European city to the ones described - please chime in.

And yes, I get it - even if I'm right, what this means prospectively is a ceist eile!

elacsaplau said:

And yes, I get it - even if I'm right, what this means prospectively is a ceist eile!

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I struggle to understand what house price indices mean even retrospectively. If we say that house prices in Dublin have risen 20% in real terms over 40 years, what does that mean.

Does it compare the average house of the 1970s with the average "house" of today. In 1970 most houses had gardens, were built 16 to the acre. Today, the average "house" is probably an apartment built to a much higher density.

cremeegg - fair points

An "apples to apples" analysis would be best!