28.07.2021

Real estate or stock markets: how to choose the best investment direction

Deividas Urbanovičius

Real estate or stock markets: how to choose the best investment direction

There are some similarities between real estate and stock market investors. At least the fact that real estate investors can earn not only from rent, but also from capital gains. Just as investing in stocks is expected to benefit from dividends, if any, and from changes in the share price. However, there are many more differences, and in order to choose the best investment direction and avoid disappointments, it is simply necessary to assess those differences.

Deividas Urbanovičius, Head of Investors Relations of the first real estate rental investment platform InRento, says that one of the biggest mistakes made by novice investors is having unreasonable expectations. Viewing property through rose-tinted glasses; hoping that one or another type of property has hidden treasures; or believing that investment easily brings a return, should always be avoided. Such hopes are a straight path to disappointment.

“Although I represent the real estate market, I always like to draw a comparison with stock markets and look for liquid opportunities. Because there are often distinct parallels and before you start investing in property, any disadvantages and their possible solutions must be assessed, ”says D. Urbanovičius.

About liquidity and barriers

The first and most often highlighted disadvantage of investing in real estate is low liquidity, in other words, limited ability to sell assets quickly at market price and at a specific time. "Even compared to the relatively illiquid Baltic stock exchange, this asset class has a low level of liquidity. And what about the offerings of the New York, Frankfurt or London stock exchanges. True, for those whose investment strategy is based on long-term investment, this disadvantage is less significant, ”notes D. Urbanovičius.

The creators of the InRento platform offer an active secondary market to solve this problem, providing clients the opportunity to sell their real estate investment to another willing investor, if such a need arises. This helps to alleviate this disadvantage and gives investors an efficient exit option, should they need it.

"The second possible obstacle is a high entry level. In fact, investing in real estate requires a relatively large amount of several hundred thousand euros. This factor discourages some from investing. Again, we were looking for a solution to make real estate investments more affordable AND accessible to more people. With InRento, you can partially invest in real estate rental projects, with an investment from just EUR 500. This provides an opportunity to get involved in real estate investment for almost anyone who wants it, ”says D. Urbanovičius.

Manage risks

Another disadvantage of real estate compared to stock markets is the relatively difficult level of diversification achieved. Diversification is one of the key pillars of many investment strategies. A lower level of diversification means more risk, which is not acceptable to some investors. There is also a risk that real estate will be destroyed or damaged.

“These can be external factors: flooding, cracking of walls, various problems caused by heat or cold, or internal factors such as problems caused by tenants, etc. Such events can have a very negative impact on the return on investment, ”says D. Urbanovičius.

“InRento”, he said, “also has some solutions to mitigate these risks. Investors are presented with real estate rental projects of various purposes, different yields and locations, thus providing an opportunity to diversify investments. And project owners are required to insure the property so that in the event of damage, it is compensated. This helps control the potential risk to some extent.

"Finally, another important difference is the relatively low real estate yield. It is no secret that investing in stocks can generate a higher return on investment, but it also leads to a higher level of risk. If you give priority to higher risk and at least 30% annual return, investing in real estate or renting it is probably just not for you, ”says D. Urbanovičius.

The most popular direction

On the other hand, the real estate market has many advantages that are not only attractive for some investors, but also useful in makeing decision. First of all, real estate is simply an easier-to-understand investment product, although it is still not the most popular investment direction in Lithuania.

"There are various reasons for this: from the lack of a culture of investing in securities to the benefits of physical assets, such as the opportunity to live in them. And if you understand the investment, if everything is clear, then it is much more convenient to invest, less opportunities to be disappointed, ”says InRento's investment manager, adding that another advantage that contributes to the popularity of this investment asset is that it is clearer and easier for most investors to understand. 

The real estate market is also attractive because the probability of impairment of these assets is relatively low. According to D. Urbanovičius, historically both in Europe and beyond, Atlantic real estate prices have a tendency to grow. Of course, there may be certain circumstances, such as the 2007-2009 global financial crisis. However, after that, real estate prices in Lithuania have been growing sustainably and reliably.

Not a bubble yet

"There are those who say that the real estate bubble has already formed in Lithuania, which should burst quickly. However, there is no need to rush in this way. In my opinion, an annual price increase of more than 12% has been provoked by the so-called 'bottleneck' situation, where the demand for those who are able and willing to invest has exceeded the current supply in a very short time. Moreover, in all the capitals of the Baltic States we are observing a good indicator of real estate affordability, which is likely to continue to approach the level of Western European capitals, which will increase prices further” D. Urbanovičius assesses the situation.

In assessing other benefits, it is necessary to mention the consistently rapid return on investment if a property is leased. No need to wait a few years, the financial flows from the leased property start to return every month. In addition, the participants of the InRento platform - the owners of the leased real estate - are obliged to pay fixed interest even when the real estate does not have tenants, thus ensuring a stable income flow for the investor.

Selection is important

InRento also evaluates the project owners themselves and the real estate property itself, so that investors can make a considered decision. This provides greater protection against inflation. “Even looking historically, with the general price level growing and inflation, real estate prices are also rising. This allows the existing asset or investment not to be depreciated. Of course, that is if the property itself is not problematic or illiquid.” D. Urbanovičius sees another advantage.

In addition to rental income, capital gains and real estate prices are also very important for the investor. "Qualitatively and professionally assessed real estate risks and opportunities allow us to expect a tangible positive price change in the next few or several years," says D. Urbanovičius.

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