17: I am a UK investor - should I invest in stocks or property in the UK?
11-03-2004
There are trends in the business world that will likely lead to a depressed stock market in the UK and US in the years to come and make property investment a more lucrative asset investment for UK and US citizens.
Baby-boomer Retiring: The baby-boomers start retiring in earnest in 2006 with a rapid rise up until 2016. When these citizens in the UK and USA retire, they will start monetising their positions in the stock market leading to a likely general depression of the stock market. Early signs of this might be appearing already. Correlation with the Japanese Nikkei index, where the stock market reached a peak of some 38,000 in the late 1980s and is now down at 11,000 is interesting in Japan, the demographics are such that there was a flood of retiring corporate workers in the early 1990s which depressed stock markets, customer spending and GDP growth. This is only just starting to recovery lead by the Chinese import demand. This demographic trend and stock market depression might also appear in the UK and USA from say 2006 onwards.
Rise of the Individual versus Corporation: Another underlying trend is one where the top value creating individuals (so called 80/20 individuals) working for large capital intensive corporations are leaving to join private equity houses, venture capital entities and to run highly profitable private firms. An example is Philip Green of Arcadia, who recently awarded himself some £450 million (dividend) for his last years work. This is possible because of his high equity stake he has in the company it highlights the massive value that the very best individual business persons can achieve in the private world of business. This will most likely lead to a trend towards the best business people creating huge value in private companies and the depression of publicly quote stock. As the most profitable companies become less capital intensive (e.g. financial services, internet, media/design) there will be less need for capital and the stock markets will likely suffer and possibly even collapse. This will not be helped by the huge balance of payments deficits in the USA and UK leading to lack of investor confidence in the stock markets of these countries investors are likely to look for high growth opportunities in India, China and the rest of the Far East, where demographics are more attractive and economies are less mature and developing. The question you should ask yourself is, if the price/earnings ratio of the average FTSE UK stock is about 15, and competition is increasing (with a squeeze on margins) then why should the stock go up from present levels? Could there be better value in private companies with P/E ratios of 6-10 that have high growth potential? Might a return of 6% in residential property investment be lower risk? Is it not attractive to leverage your investment using the banks money via residential development something you cannot do with stocks?
Demographics vis-ΰ-vis supply and demand: Meanwhile, the populations of both the USA and UK are set to rise firmly in the next thirty years (see charts). As PropertyInvesting.net has reported before, the increase of Nimbyism, lack of available land, stringent planning constraints, increases in building costs and smaller numbers of people living in each home will continue to put a big pressure on housing demand. There is forecast to be an increase of 900,000 people living in the London area by 2015 where will all these people live? Meanwhile there is a steady decrease in the amount of people living in each home (refer to chart at bottom of Special Report) and no appreciable increase in the volume of homes being built. Huge numbers of IT and service related jobs are forecast in the M4 corridor, M11 corridor, Canary Warf and City/West End locations putting further pressure on housing demand.
Interest Rates: Low inflation should remain low because of competitive working practices in the UK and USA, productivity improvements (re: internet and retail) and globalisation (e.g. cheap imports and out-sourcing). The key risk is higher energy and commodity prices. The predicted low inflation rates should lead to low interest rates and sustained high earnings to house price multiples.
Prognosis: For the above reasons, PropertyInvesting.net believes the medium to long term future of residential property investment in the London and SE England region is good. Our favoured investment locations to take advantage of these fundamental, new communications, jobs and developments are:
Stratford (London)
Plaistow
Canning Town
Woolwich, North Woolwich
Silvertown
Hackney
Wembley
New Cross
White City
Northfleet/Gravesend/Bean (Kent)
North Kent country property within 15 minutes drive of Ebbsfleet (Kent)
Central Kent country property within 15 minutes drive of Ashford
St Neots area (Cambs)
Slough (Berks)
Preferred property is that with the minimum £/square foot cost, located close to rail connections either good value secure flats or terraces (double bedrooms only).
What about the crash? Talk of a crash in London house prices is overdone PropertyInvesting.Net can see a scenarios whereby they could drop by say 10% but rise again after interest rates peak and drop back again the drop on interest rates might happen as early as Spring 2005 if the economy slows as seems to be happening in early November 2004. if you have any alternative views or comments, please give feedback to enquiries@propertyinvesting.net . We can add these views to our Newsletter.
PropertyInvesting.net team
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