Real Estate Investments compared with Stock and Shares

In the last few years, especially under the present dispensation, the nation’s financial system has continued to gain increased sophistry.
Full thanks to the revolutionary efforts of Professor Charles Soludo in the banking sector and Ndidi Onyiuke Okereke at the Stock Exchange.

There is now greater awareness of financial engineering and products than ever before.

Many people are now attracted to the capital market on a daily basis. Some are caught in-between the extreme ends of whether to invest their hard earned resources in real estate ventures or in stock and shares.

Real estate investment shares many similarities with investment in stock and shares just as much as they differ. On the flip side of similarity, they both constitute modes of investment on long, medium and short term basis.

If well administered, they are both better than keeping huge sums of money in deposit accounts to yield little or no interests. Current accounts generally do not yield interest except these days when banks have come up with many differentiated products. Differentiation of products has now become a powerful tool that the banks are using to gain an edge in the face of stiff competition.

For a start, real estate and investment in stock and shares yield income periodically. However, while in the case of real estate, there is always an income called rent gained in the way of capital recovery, it is not always so for stock and shares. Income here is relative, depending on the overall performance of the public quoted company and the decision of the share holders whether to declare dividends (which represents income to the investor) or not.

In some cases, excess profit which may have been declared as dividend is ploughed back as bonus shares to the holders which means they now have more shares in the business. Therefore, a profit essentially has to be made in the case of stock and shares for the investor to receive income in the way of dividend.

Liquidity in real estate, as in stock and shares are in relative terms. Liquidity is the ease by which relative investment can be converted into cash by way of disposal. For real estate, it would depend on the type of property. For example, it is a lot easier to dispose of residential and commercial properties in the real estate market than industrial or agricultural properties.

And even within the context of residential and commercial properties, there are variants that will sell quickly and some that will not. For example, it is much faster to sell apartments and equivalents or lower accommodation than detached houses for which financial commitments require much more.

Location too plays a major role. A commercial property will sell very quickly if it is well located. On the other hand, it is much easier to dispose of investment in stock and shares. All it takes is an instruction to a broker and within a day or two, conversion will be made and the investor will obtain the cash equivalent with or without profit. Again, a hot stock in the capital market will sell faster, while a poor performing stock would probably not sell at the price it was bought which constitutes a loss to the investor and this why it is called "public liability".

The gestation period differs for real estate investment and investment in stock and shares. For stock and shares, ownership or change of ownership of shares can be authenticated and reflected on the quoted company’s record within a matter of days. It is not so for real estate, owing to several factors that border on bureaucratic bottlenecks. Even if a sale transaction flies quickly, it takes a fairly long time to obtain governor’s consent to establish the new ownership status. The new owner has no legal status until these issues are established. Sometimes, it takes several years. It is the same draw back with new development. It takes fairly a long while to obtain planning development approval to assemble resources on site to actualize the vision. This is why some real estate dreams are killed during gestation.

The required volume of capital injection is another area where real estate investments differ from investment in stock and shares. For real estate, the developer/promoter requires mega bucks in millions and sometimes billions to execute the vision. However, with unitization, a relatively new concept of real estate financing, which allows individuals to hold varying equity shares in real estate now on the upswing, this issue may not be such a strong factor again. But it is very unlikely that a minimum commitment will not be laid down as condition. On the other hand, the problem of amassing large sums of money is not necessary in investment in stock and shares. Although most publicly quoted companies fix a minimum, they are more easily affordable. For as little as N7,500, an average Nigerian can hold shares in a multi national institution.

On capital appreciation, the odds are in favour of real estate. Real estate investments generally appreciate over time. That is why they are used as hedge against inflation. A building that was erected 10 years ago and was worth N10million is worth much more today. Real estate values are in tune with present day realities. Except for issues of mismanagement, poor judgment, force majeure, natural disaster or major default, a real estate investor hardly loses. It is not so for stock and shares. There are high chances of fluctuation in value. When a stock is doing well, the quoted price appreciates and an investor earns a premium but when a stock is not performing well, the price drops and the investor
incurs a loss. In the capital market today, many stocks have fallen in value, while some have risen steadily. Some wise investors have built up prosperity by very careful aportimment of investment in stock and shares. This is why the advice of a broker is necessary to make a decision.

Another criterion is the security of capital. For the investor in shares and stock, there are far too many factors outside the control of the investor. He certainly cannot do much to shore up the value of his investment. In most cases, he tries to minimize his losses. Other people are in control of the affairs of the company and they run it on a daily basis. At best, he can monitor his investment and make a quick get away when things are not looking up. The general rule as they say is "to buy shares when every other person is selling and to sell when every other person is buying". It does not always apply in practice.

For real estate, the capital is well secured even more so if the property has a comprehensive insurance scheme. At least, the investor has some element of control and can have a say in the management of his property. He would ensure that it is well managed to a position that it can realize the optimal income and would do everything to secure his capital investment. Fortunately, both these investments are now accepted as collateral by banks to secure a facility, which shows that stock and shares has evolved powerfully as a major form of investment in the country.


Article culled from The Daily Sun