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The Bias towards Real Estate
In the UAE, there seems to be a strong bias towards investing in properties over the stock market.
Before continuing we must say: there’s certainly value to investing in real estate, though we don't believe it's necessarily the best asset class, nor do we believe that it's the only one clients should invest in.
The Cause
Investing in real estate is often seen as less risky than investing in stocks for a few reasons:
- The value of real estate is not determined on a daily basis like stock prices are. This creates an illusion that real estate investments tend to be less volatile and provide more long-term capital growth.
- Real estate is a tangible asset. Unlike stocks, which simply feel like a piece of paper representing ownership in a company, real estate is a physical property that can be touched and seen. This can make it feel more secure to investors.
- Real estate can provide a steady stream of income through rent, which provides investors a tangible form of return.
On the Other Hand...
- While the ability to monitor the value of your portfolio on a daily basis is stressful, it's important to remember that the value of a well diversified stock portfolio grows irrespective of the short term price fluctuations in the long term.
- Though owning shares in a public company feels less “real”, it's important to remember that as an investor you hold ownership in the company’s earnings and profits. By investing in as many stocks as possible, you guarantee growth and return over the long term.
- While income through rent may seem like a secure return, a diversified stock portfolio can also provide a monthly income to investors. Stocks can either distribute their earnings as dividends or reinvest the dividends back into the company. If reinvested, the value of the stock goes up and that growth can be distributed back to you as income.
Takeaway
Overall, while both real estate and a diversified stock portfolio are good investments in their own rights, it’s a false statement to claim real estate to be safer. Thanks to historic data [source:www.spglobal.com], we can even say that over a 10-year period, global real estate has underperformed when compared to diversified stocks, as shown in the chart below.
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