In the current search for yield, we inevitably arrive at real estate but as many of us have been there for some time, it begs the question: is it now too expensive?
We feel this may well be the case, particularly in the short term and particularly in London and some of the commuting counties, but for those who seek long-term investment, carefully chosen residential
property for investment purposes will still have its appeal.
Looking at some alternative investment strategies in property, we have seen a similar escalation of interest during the past few years in Global REITS, UK residential and commercial property, and student accommodation funds. Likewise, the attractions for the asset class have primarily been to secure income and growth, given the uncertainties surrounding bond markets and low interest rates.
While equity and bond funds have delivered excellent returns over the past few years, it is our opinion that asset classes such as property, excluding the obvious current attractions of global equities over
bonds, still offer investors an alternative asset class that is not correlated to either bond or equity
performance.
Liquid assets
Property funds during the past 12 to 36 months have delivered very attractive returns to investors and, according to the Investment Association Property sector, over those time periods the asset class on
average has delivered returns of just over 15% and 38%, respectively.
Global REITS or UK commercial property funds can experience liquidity issues, and have certainly done so in the past, but other asset classes such as UK corporate bonds or UK smaller company funds could be affected in the same way.
Any future returns across the UK, or indeed Western Europe, could be further driven by healthy income growth and rising rental income from the strongest commercial and real estate locations, particularly as the economy recovers.
With low to negative interest rates impacting across the majority of Europe, wealthy Europeans might be more inclined to invest further liquidity into property to secure a better return on capital. Also, with affordable lower European mortgage rates, the temptation to buy might become a rising trend as we
have seen over many years in the UK.
We are seeing a recovery in the housing market in the US and a similar story for Asia. In fact, Japanese Prime Minister Shinzo Abe’s economic stimulus programme, along with Tokyo’s hosting of the 2020 Olympic Games, has strengthened property demand in the city.
Likewise, the election of Prime Minister Narendra Modi in India has increased expectations for major reforms throughout the country, boosting its economy, stockmarket and property market.
Undoubtedly, property has rewarded investors handsomely over many years, be it investing directly in bricks and mortar or through investment vehicles such as residential and commercial property funds or global REITS. However, we still believe in a well diversified portfolio, therefore we would continue to
have exposure to property as a valuable uncorrelated diversifier against other traditional asset classes such as bonds or equities.
