I was a firm believer and even made several posts (on other forums) saying terrible things that on-screen buttons were terrible, but at least in a 5'' (xperia Z) i honestly quite like them on-screen. They feel classy and xperia UI has a nice animation when you press them it makes it feel neat to press them.
About the screen you lose, in a 5'' its negliceable, if you ask me about a 4,0'' screen than i say capacitive buttons are better because the screen is already "small" and you want to make the most out of it and the buttons make you feel "cheated".
But, you now have some ways to make it even less of a hassle (if rooted). You can download apps to change the buttons to a hidden pie menu when you perform certain gestures, etc. There is even some ways to keep the soft-keys but make them smaller in DPI.
When i got the xperia Z i always tought that the 1st thing i would do would be to improve the softkeys because i hated their concept, but i haven't touched them yet and i don't think i will because they actualy look fine on a 5'' screen.