Investments in real
estate compared with Stock and Shares
By PAUL ERONSELE OJENAGBON (Email: pauloje2000@yahoo.com)
Monday,
January 15, 2007
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Office property define skyline in Victoria Island
Photo: Sun News Publishing |
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In the last couple of 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.
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