Property is outperforming all other types of investment.
According to this year’s IPD Index, you can achieve total gross returns of £17.8 via property – much more than the 11.8% and 0.5% bonds and equities respectively.
It’s not just a 2015 trend either. Property has a long history of outperforming the stock market and savings accounts. Since 1996, a £1,000 sum invested in UK property has appreciated to be worth an astonishing £13,048 while equities (FTSE All-Share index) only grew to £3,082 UK government bonds £2,924 and cash just £1,949.
So, what is the best property investment – where can these returns be maximised and is there anything else you need to consider when purchasing property?
Residential buy-to-let
Average yields on offer: 5%
Summary:
Most private investors will be familiar with this asset class. Buy-to-let is a modern-day phenomenon in the UK. A combination of high house prices, restrictive lending criteria, and, more latterly a growing preference for the freedom renting brings, has resulted in the private rented sector doubling in the past decade.
Now it is estimated over five million people are looking for rental accommodation and there is an urgent need for more housing.
What to consider:
Buy-to-let is thriving, but it is not easy to master and inexperienced investors may find it difficult to achieve high returns. There is significant yield variation within the UK’s geographical market and tenanting a property is never a sure thing. Investors can do a little research to find that regional city centre markets such as Manchester, Southampton and Sheffield make the best buy-to-let locations.
As well as yield, there is capital growth to consider. For many investors this has been a substantial bonus over the past few years, with house prices rising over 20% in some areas of the country. Capital growth requires a successful exit to be truly considered a return. Fortunately, residential is one of the most liquid property classes and sales can be completed in weeks.
Finally, overall buy-to-let returns are harmed somewhat by a long list of potential overheads including property maintenance, mortgage repayments, letting agent fees and void periods.
Prime London
Average yields on offer: 2.96%
Summary:
Prime London property has been very popular with overseas investors in recent history. The finite space in the capital means the vanity purchases are in short supply. Subsequently, returns manifest as huge price growth and yields are low – with few people capable of affording the rent to make such a high-value property yield.
What to consider:
Even if you do have the budget to pay the asking prices that are usually millions of pounds, you should assess whether the market can be sustainable in the long term.
Recent research from LSL shows that London no longer represents the highest capital growth in the UK. London’s growth potential may have been subdued by the spectre of mansion tax prior to the general election, but investors have been warning of a price correction for some time.
With such an elite group of prospective buyers to sell to, you also need to think about any potential exit from the market and considering there was a 16.5% fall in the number of London homes sold in the first quarter of the year, this could be a major drawback.
Commercial
Average yield:
- Offices: 4.50%
- High street: 10.00%
- Prime warehouse: 5.00%
Summary:
Chiefly thought of as an institutional or fund-bought product, commercial property market comprises retail, industrial buildings and offices. It usually yields more than standard residential property, but every investment needs to be judged on its own unique criteria.
Unlike residential, commercial assets are usually too expensive for the standard investor to purchase outright. You typically invest via a fund that holds actual physical property in its portfolio or by using a real estate investment trust (Reit).
What to consider:
In general, real estate is one of the less volatile investment classes. However, commercial property is not a great hedge against wider economic market factors – primarily due to its reliance on job creation or consumer spending. In 2008, commercial property values plummeted 44% in the blink of an eye as the US sub-prime mortgage crisis hit home.
If you want to invest in a fund be wary of smaller entities. In order to mitigate risk, a fund should have around 40 properties under its management.
If you decide to exit a fund simultaneously to a lot of other investors, the provider may have to sell some of its assets before you receive your capital – something that can take a substantial length of time.
Student property investment
Average yield: 6.25%
The UK’s highest performing asset class since 2011, it combines many of the favourable attributes from residential and commercial property.
The advent of purpose-built student accommodation has changed the nature of the sector from both a customer and investor perspective. Students are now getting the accommodation they desire – and are willing to pay premiums of up to 70% for it – while investors can purchase self-contained en-suite properties for much less than standard residential stock.
High yields are combined with capital growth that is aligned with the wider housing market, but tempered slightly by your property’s ability to generate yields.
More than £4.2 billion has been spent on student property in the first six months of this year alone.
What to consider:
Unlike residential buy-to-let, student property investment is often available as a fully managed asset. Like commercial property, this means that returns are often NET of all costs and fees, which is great for managing cashflow.
Student property is often considered the ultimate recession-hedge. It was the only property class in which returns increased during the recent financial crisis and with a predilection for people to upskill and study in economic downturns, student property is fast becoming a diversification must-have.
As with every investment class, individual assets must be assessed on their own merit. In the student accommodation sector there is a huge emphasis on quality of housing and quality of experience, and locations must be close to the popular Russell Group universities.