ASX property stocks are likely to beat property investments in 2021

The debate on whether you can get better bang for your investment buck in property or shares rages, but there are signs that ASX shares are still the place to be.

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The debate on whether you can get better bang for your investment buck in property or shares rages, but there are signs that ASX shares are still the place to be.

This is despite the S&P/ASX 200 Index (Index:^AXJO) struggling to break its record while some experts are predicting a 15% increase in house prices for 2021.

But lovers of property should take note. Australian real estate investment trusts (A-REITs) are tipped to deliver 18% total returns this year, reported the Australian Financial Review.

This is largely because ASX property stocks have largely lagged in the COVID-19 market recovery.

set of scales with a house on one side and coins or asx shares on the other

Image source: Getty Images

ASX property stocks trading at a discount

While ASX stocks like the Fortescue Metals Group Limited (ASX: FMG) share price, Afterpay Ltd (ASX: APT) and Kogan.com Ltd (ASX: KGN) share price surged to record highs as the ASX bounced, A-REITs underperformed the market by 6% in 2020.

But the analysts at Jefferies believe the tide is starting to turn. The bad news is largely reflected in share prices while not much of the good news is.

There is a disconnect in the market. Investors believe in the tailwinds that are supporting the bright outlook for our residential property market, but they haven't really factored any of that into A-REITs.

This certainly puts an interesting spin on the ASX shares vs. property debate!

What's good for the goose is good for the gander

One of these tailwinds are the record low interest rates and bond yields. These are inflating property prices.

The economic recovery from the COVID recession is also supportive of property, as is the rebound in the job market.

These factors are just as significant for A-REITs and they give Jefferies reason to believe ASX property stocks will play catch up later this year.

ASX property stocks vs. property investments

Of the 18% expected return, 4.7% of that will come from dividends, the AFR quoted Jefferies as saying.

To be fair, there are distinct differences between investing in property stocks and residential property. For one, many listed property groups are also exposed to office and retail properties.

The outlook for these segments are more convoluted. While employees are starting to return to their desks, demand for office space is unlikely to return to post-COVID levels.

The pandemic has also caused a de-rating in megamalls. Who wants to be in the middle of a crown these days when you can shop online from the safety of your sofa?

A-REITs to play catch-up in 2021?

This explains the weak performance of the Mirvac Group (ASX: MGR) share price, Scentre Group (ASX: SCG) share price and Vicinity Centres (ASX: VCX) share price – just to name a few.

But as mentioned earlier, these negatives are already reflected in current prices, according to Jefferies.

Further, rental collection is recovering and these groups own quality properties that the market is not fully appreciating.

Foolish takeaway

If Jefferies is right, it would make more sense to own ASX property stocks than brick and mortar, in my view.

For one, transaction costs are much lower when buying and selling shares. The capital outlay is also far more manageable for many.

I am not saying one asset class is better for everyone as this really depends on your circumstances. Diversification is also an important consideration.

But the expected returns from A-REITs does give food for thought.

Brendon Lau has no position in any of the stocks mentioned. Connect with me on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO and Kogan.com ltd. The Motley Fool Australia has recommended Kogan.com ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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