Investments do rise and do fall in value and we strongly advise that professional advice is taken before investing your money
Bricks and mortar are considered to be a very successful asset class and anyone who has been lucky enough to own their own home would vouch for that.
When advising my own children on when to buy their own home, based on my experience I would say, get your first job and then save, save, save! Once you have enough for your deposit then jump onto the property ladder as quickly as possible, as this asset is best bought the earlier you can afford to invest. Of course there have been exceptions to this, but I would suggest that a passive attitude to this asset class is the right approach from a residential owner perspective.
Now, if you look at recent performance of this asset class, and I will use my own personal data for analysis, the returns that I have experienced have been c4% p.a. over 8 years, using Zoopla as the data provider. So, historically this is not such a good return based on previous experience, as it used to be said that that property would double every 7 years, therefore achieving an average return of c10% p.a.
Here at SM & Associates we do not typically advise clients about this asset class, unless they have turned to us for buy to let investment, however we do advise on property funds which mainly focus on industrial units, offices and retail units, in other words commercial not residential.
We typically focus on the ‘bricks and mortar’ funds as opposed to the REIT’s. A REIT is very liquid but our view is that it acts like an equity investment and therefore does not offer volatility diversification.
With the headlines telling us that the ‘march of the machines’, led by the likes of Amazon is taking its toll on the high street, I as an investor want to better understand what impact this may have on property funds. So, I jump in my car and go to a meeting with one of the largest fund managers in this sector - 'Justin' whom is the funds co-manager, and then try to understand how he is positioning the fund's money and what he expects going forward.
The important point here to understand is the cost of money and the yield that tenants are prepared to pay today and potentially in the future. Once you have this data you can build your spreadsheets to price ‘commercial property’ and then tactically make your investments.
Residential property is similar but supply and demand is more prevalent I would say. Also, wage inflation and the cost of money, i.e. the mortgage rate, affordability and the prospects of future wage rises are likely to be the key determinants of future house price inflation.
Ok, so coming back to Justin and how he makes his decisions when running the funds, he takes time to explain that the risk premium investors require is 2% over the ten-year gilt yield, and within his yields, fully expecting rate rises over the coming years, he is looking to maintain this rate differential. His portfolio currently has a 4.8% yield and therefore he is confident of maintaining the risk premium to protect the capital value of the portfolio.
So, the question that I ask is how does the carnage on the high street affect you? He admits that some retail units are under attack by private equity scoundrels who are using the CVA laws as a negotiating tool to reduce rents, but he is mindful to emphasise that c60% of the portfolio is ‘prime location’, with c15% in cash, and therefore my analysis leads me to think that based on the fund manager's style, c25% of the portfolio is where he can gain some speculative uplift and improve yields for capital gain. It’s always good to get an insight from those at the ‘coal face’ as they are typically the ones who can see the strengths and weaknesses of their ‘markets’.
This is a typical example of how we at SM & Associates continue to review markets and investments for our clients so that we can potentially optimise our client’s portfolios.
Steven is a Fellow of the Personal Finance Society, whom is passionate about investing and getting the most from your money.
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