Asset class comparison: Property reigns supreme

By Matthew Okeefe

Property has been one of the top-performing asset classes of 2015, returning 13 to 14 per cent for the year, in contrast to that of other asset classes over the same period; UK government bonds (‘gilts’) returning 1%, while UK equities were down 1%.

 

“The forecast UK property income yield for 2016 is 5.2 per cent. This is 3.3 per cent greater than ten-year gilts, and with rents growing by 3.4 per cent, we believe that investors are going to increasingly seek property investments.”

(http://www.whatinvestment.co.uk/financial-news/markets/2504731/is-property-a-good-investment-for-2016.thtml)

Total-Return-by-Asset-Class-42-years

Source: http://www.hearthstone.co.uk/private-investors/asset-class/why-uk-residential-property/

Investing in property is a more tangible option over bonds or equities as the latter asset classes carry more uncertainty for some people if you can’t physically see it. According to a Savills report (http://www.savills.co.uk/_news/article/55328/185344-0/1/2015/uk-homes-now-worth-a-total-of-over-%C2%A35.7-trillion–up-10–year-on-year), UK Residential Property is the UK’s largest asset class, estimated at over £5.75 trillion, more than the combined total of UK equities and commercial property. We believe there is relatively more control in owning a property as there is more predictability in the market. In general, the FTSE is more likely to crash over night from social/political factors whereas decline in the housing market can be spotted/established earlier. UK Residential property returns have been historically quite stable and averaged around 14% per annum from 1970 to 2012 (http://www.hearthstone.co.uk/private-investors/asset-class/why-uk-residential-property/) .

correlation-1

Source: http://www.hearthstone.co.uk/private-investors/asset-class/compared-other-asset-classes/

A result of residential’ s low volatility and consistently strong returns over an extended period is the fact it exhibits low correlation with other, more volatile asset classes such as equities and commercial property. When equities rise or fall, residential property has historically remained stable. In other words, performance of residential property is uncorrelated to the performance of equities. Therefore, for those looking for a potentially safer, less risky option, residential property might improve the overall stability of an investment portfolio. By adding real estate to an existing portfolio of equities and bonds, returns could be generated with a lower risk, or higher returns can be generated with the same risk.( https://www.credit-suisse.com/media/production/asset-management/docs/real-estate/white-paper-real-estate-as-an-asset-class.pdf)

Property Vs Shares:

Comparison of potential costs and returns on property and stock market investment. Basis of buy to let in example below: Purchase Price £200,000, Deposit £50,000. NB: this is an example only and figures may fluctuate depending on different circumstances
Buy-to-Let Shares
Deposit £50,000 Investment £62,000
Mortgage Fee £2,625 Annual fund supermarket charge 0.4pc
Stamp Duty £7,500 Annual Fund cost(approx.) 0.82pc
Legal Fees £1,200
Home Buyers Report £500
Valuation £250
Total Upfront Cost £62,075
Total income after 25 years after tax £45,300 Total income after 25 years after tax £108,137
Profit from house price growth £470,271 Capital Growth £158,091
Total return after tax £386,976 Total return £266,228

Source: http://www.thisismoney.co.uk/money/investing/article-3341827/Are-shares-better-bet-buy-let-Osborne-s-latest-attack-landlords-property-FAR-lucrative.html

Despite having gone through a financial crisis in 2007 which saw the average prices fall between 2007-2008, the house price index as per Land registry (http://landregistry.data.gov.uk/app/hpi) corrected itself growing at an average rate of 6% annually, 2012-2015 in relation to a 2% growth in the FTSE 100 (http://uk.investing.com/indices/uk-100-historical-data) . This shows that investing in property can be more lucrative due to its steady appreciation in capital value, regardless of major shocks. However, in the above viability model from “thisismoney”, we see simplicity of the equity model in comparison to that of buy to-let in terms of upfront costs and taxes (recent stamp duty taken in to consideration). There is less hassle investing in stocks, but the return in property overtime can make it an attractive option in the long run.

’Halifax house price data for the period of 2000-2014 shows £100,000 invested in property brought in a 132 per cent return, whereas the same sum put into UK equities, even with dividends reinvested, made 83 per cent’’.(http://www.thisismoney.co.uk/money/investing/article-2958803/Cash-stocks-property-best-returns-past-30-years.html).

dividends-ftse_3540880b

Source:(http://www.telegraph.co.uk/finance/personalfinance/investing/shares/12081154/Dividends-in-danger-Only-24-shares-now-yield-more-than-the-FTSE-100.html)

The above research done by the French Bank, Societe General “tracks the proportion of shares in FTSE 100 that yield more than the market index” (http://www.telegraph.co.uk/finance/personalfinance/investing/shares/12081154/Dividends-in-danger-Only-24-shares-now-yield-more-than-the-FTSE-100.html) . The chart confirms the percentage of this proportion is lower than at any point for 25 years. This implies that the FTSE 100 is heavily reliant on a few big companies, and if any decide to cut or suspend their dividend payment, it could bear a huge load on the stock market, in general. Hence the risk factor is quite substantial.

Property Vs the Gilt/Bond Market:

Issue of bond by a company, or a Gilt by the government has the purpose of lending money to the issuer for a fixed percentage rate of return. In the short run, like the fixed income bond market, property investment can lock in cash flows too, in form of leases and tenancy agreement. Even though similar in nature to bonds than to stocks in terms of its less vulnerability to ‘shocks’ and a more stable yield, we observe from the below figure that over the course of the last two years, yields from Government securities has nearly halved, whereas not only has property yields stayed consistent and less volatile, but even provided a higher return than the government securities.

Figure 1: Source: Bank of England(http://www.bankofengland.co.uk/boeapps/iadb/index.asp?Travel=NIxIRx&levels=1&XNotes=Y&C=5TU&XNotes2=Y&Nodes=X4051X4052X4053X4058&SectionRequired=I&HideNums=-1&ExtraInfo=true&G0Xtop.x=44&G0Xtop.y=4) /Home Let(http://homelet.co.uk/homelet-rental-index/london) /Land registry((http://landregistry.data.gov.uk/app/hpi)

 

However, with strategic bonds you could earn up to 4% yield, compared to 2-3% for corporate bonds http://www.thisismoney.co.uk/money/investing/article-2972668/INVESTMENT-EXTRA-property-bonds-s-safest-spot-savings.html). But the thing to note is that they come with more underlying risk like in the case of equities, as companies are more prone to default.

 

Conclusion:

As per our above findings it’s not hard to determine that property investment, residential in particular, can offer a more stable stream of income. However, nonetheless, some bond markets allow you a yield of about 4-5% and same with the stock market (https://boringmoney.co.uk/funds/Funds-explained/Buy-to-Let-or-the-Stock-Market) and with the tax regulations being imposed on property investors, it will be idealistic to have a mixed portfolio. Having an investment in property may offset the uncertainty of equity and bond markets and it can still allow you to earn equally if not higher yields although there is risk involved (please consult our risk warnings). ShareProperty provides you with such a platform, that rather than investing all your savings in the form of buying a property, you can lay part of your investment in property to complement your mix of asset class. We believe that property is an essential part of any well-diversified portfolio and, in addition to a balance of potential capital growth and income returns, property investment can bring diversification to a portfolio on many levels. (http://www.smartpropertyinvestment.com.au/opinion/15230-diversifying-your-portfolio) .

**Please note that investing in property involves risks, including loss of capital, illiquidity (the inability to sell assets quickly or without substantial loss in value) and lack of dividends and should only be done as part of a diversified portfolio. Your capital is at risk if you invest. Tax treatment depends on the individual circumstances and may be subject to change in the future.

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