Land or stocks: Which one would make you richer in the long-term?

“We are now selling phase two with ready titles, over half already sold. Those who bought plots in the first phase at Sh300,000…, the plots are now worth Sh7 million, yes seven million shilling. You can own a plot by sending an SMS to…’’

An enticing advert during a popular morning radio show goes much to the attention of many listeners in a matatu to work. The presenter goes into details about the land, three kilometres off Thika Road with amenities on location and promising development projects expected in the neighbourhood. The price is Sh850,000.

Owning a plot in Nairobi remains the primary topic of discussion among investment groups, professional peers, business partners, friends and even families. The obsession with land is mind blowing and the dealers are smiling all the way to the bank.

A recent report by real estate firm, HassConsult, revealed a 535 per cent appreciation of land prices in Nairobi, in the last seven years with an acre that cost around Sh30 million then now going for Sh170 million.

So fast is the appreciation that individual buyers are have been edged from the market, instead turning to institutions, chamas and saccos to snap up prime property around the city.

EXAGGERATED PRICES

Another study by Standard Chartered Bank, in September, last year, said that seven in every 10 middle class Kenyans plan to buy or move into a better neighbourhood in the next two years, with many of them eyeing estates with access to shopping malls and good social amenities.

Why is land the only form of investment that everyone seems to be thinking about? Is there a risk in the push to own land? Is it the only viable option for long-term investors?

While many experts and investment market analysts agree that land has been a golden opportunity for the past two decades, they contend that the trend may not be sustainable going forward.

Mr Peter Ng’eno is the General Manager, UAP Investments, in Nairobi. He says there is a dire need to educate Kenyans, especially the youth, on alternative investments.

“Kenyans have an obsession with land. How fast would you acquire land?

What if you want to dispose it? Are you assured of the dynamics such as change of security in the area or shift of development plans in the locality?

Compared to stocks and bonds, land is not the best option certainly,” Mr Ng’eno told Money.

Mr Nge’no added that Kenyans need to learn from the US where property price jump and drop pushed the country into recession, collapse of banks and loss of millions of jobs.

In the US, huge loans were acquired using mortgage-backed –securities, which offered attractive rates.

However, home prices dropped sharply after 2006 making it difficult for borrowers to repay, massive defaults occurred leading to collapse of major lenders in 2008.

Sky-high property values drove households into debt with the ratio of debt to disposable income rising from 77 per cent in 1990 to 127 per cent in 2007.

Nearly nine million jobs were lost between 2008 and 2009, roughly 6 per cent of the workforce.

PROPERTY CYCLE

US housing prices fell nearly 30 per cent on average and America’s stock market contracted by about 50 per cent by early 2009. As of early 2013, however, the US stock market had recovered to its pre-crisis peak but housing prices remained low even as the country grappled with joblessness.

Land dealers in Kenya, however, maintain that the real estate industry would withstand the test of time considering the fact the country has long way to go in infrastructural development.

Daniel Maina is the proprietor of Nairobi-based Harvey Estate Properties. He says appetite for land has driven many to take huge loans.

Mr Maina, however, does not dispute the unrealistic rise in land prices.

“A by-pass road coming up, an institution, a power line closer to a plot and other development projects outlined in the country will continue to push up prices. It means chances of growing investment tenfold in the property market is still realistic. Diversifying investment is not a bad idea either, I also buy stocks,” said Mr Maina.

A research expert at Knight Frank Property Kenya, who sought not to be named for lack of authority to speak on behalf of the company, said increasing appetite for land as a long-term investment is due to past testimonies of success in the market.

He, however, warns that land in Kenya will eventually go through the usual property cycle of boom return and stagnation.

He therefore notes that it would be wise to diversify to other investments such as stocks and bonds to ease pressure on the demand for land, which he believes is being valued using unstable parameters.

“Bonds and stocks are good options.

There is relative transparency on how the market is performing and informed decisions are easy to make compared to land, whose value may be based on a planned road, mall or simply speculation. The prices will definitely drop and some anticipation will be dampened.

What we don’t know is when but meanwhile, property dealers will continue making a kill,” the Knight Frank researcher told Money.

He adds that investment in land has become unrealistic and is turning more cultural than commercial.

“How do you explain an empty plot rising in value without even a tree being planted?

There ought to be reasons for its appreciation. I think the more everyone becomes obsessed with land, the faster it will fall sharply as a valuable option for long-term investment.”

NO LAND LEFT

Mr Ngeno advises that the power of compounding an investment in the long-term can turn an investor rich as long as they remain focused and patient in the stock market.

He says many investors make the mistake of buying when they should sell and sell when they should buy.

“In stock market, profits are enhanced through compounding or re-investing any returns and dividends. Buy and hold for longer and do not limit your risk appetite if you want to earn more.

There are non-risk options such as government securities. Stocks also offers an opportunity for investors with low capital to start unlike land prices that are not anywhere below say Sh300,000.

There will be no more property to buy around Nairobi, for instance, in the near future,’’ the UAP expert, who has worked in Canada, told Money.

The minimum shares one can buy at the Nairobi Securities Exchange is 100, and going by the most expensive stock, an investor can start with as little as Sh150,000.

Investment experts also believe that the stock market is good for both long-term and short-term since one can earn dividends just like in rental houses. The cost saved on the construction of a house before you rent cannot be compared to the administration fees paid to stock portfolio managers.