Is property a good investment for 2016?
03-02-2016
News
Property investors remain in a strong place to profit in 2016 according to Steven Grahame
Steven Grahame manager of the North Row Liquid Property fund writes for What Investment on the prospects for property investors in 2016.
Property was one of the top-performing asset classes of 2015, returning 13 to 14 per cent for the year – a significantly superior total return to that of other asset classes over the same period. For example, UK government bonds (‘gilts’) returned 1 per cent, while UK equities were down 1 per cent. For 2016, we believe that the risk-return profile of property is less obvious. Certainly, there will still be notable advantages achieved via investing in property; however, investors should proceed with caution. Global growth is predicted to continue to ease during 2016; this follows a slowdown in 2015 to 2.7 per cent, down from 2.8 per cent in 2014. These numbers are all considerably below the Organisation for Economic Cooperation and Development (‘OECD’) historical average of 3.6 per cent. This is despite the consistent attempts to stimulate economies through various means, such as quantitative easing.
Changing times
There are structural changes occurring between the developed and developing economies. A combination of these structural changes and oversupply has arguably deflated crude oil prices, which have decreased by 35 per cent, and commodity prices, which are down 25 per cent over the past year.
These conditions have precipitated a low-inflation environment, which effectively amounts to a tax cut for developed economies and their consumers.
At its December meeting, the US Federal Reserve raised interest rates by 0.25 per cent to 0.5 per cent. We believe that this hike will be beneficial to investors in fixed income and property. The rate hike may increase the attractiveness of US assets to global investors, which in turn may lead to an appreciation of ‘With rents growing by 3.4 per cent, investors are going to increasingly seek property investments’ in the US dollar as demand for the currency rises. Conversely, commodities denominated in US dollars will become less attractive and demand for them may fade further.
In other words, we believe that inflation will continue to be benign, remaining at this current low level for some time. As such, investments that provide a good level of fixed income or rental income are going to become increasingly attractive to investors seeking consistent returns. 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.
However, we are starting to see some worrying signs; bank lending to commercial property is now at similar levels to that seen in 2007, around £25 billion. A significant amount of this lending is at a loan-to-value ratio of more than 65 per cent.
The crux of the issue is that commercial property remains attractive, but the risks are
now growing. We are inclined to believe that central banks are at risk of delaying their rate
rises for too long and are, once again, allowing too much leverage to build up.
Time to take profits?
Our opinion is that investors should consider taking some profits from core property funds and think about gaining more liquid exposure to property via alternative funds and/or real estate investment trusts (REITs).
REITs are currently trading at a discount to their net asset value (NAV), while managers are gradually reducing their debt levels. We are not advocating a complete sell-down of physical property, rather encouraging diversity within the property investment realm. The prudent investor will proceed with caution and will actively aim to discover the value that is certainly in the market.
In our view, property returns are going to be attractive in the short term. The consensus forecast for 2016 predicts a total return of 9.3 per cent, while we take a slightly more bullish view than this. This is substantially less than previous returns of both 2014 (around 18 per cent) and 2015 (13 to 14 per cent). Therefore, we advocate a cautious and diversified approach to future investments in property.
We are now actively speaking to a number of investors, not only about injecting liquidity into their property portfolio, but also about strategies that may hedge or preserve value should there be a future downturn in the market.