Nobody likes throwing good money after bad, myself included. So whether you are an experienced, serial purchaser of property at auctions, or a greenhorn psyching yourself up to make those first tentative bids, there’s no harm is taking time out occasionally and just checking to see that property is still the best place for your money.
Now let me make clear from the outset that this “review”, for want of a better word, has far wider implications than merely considering the current state of the property market. It also has wider implications than what the market might do in the future.
I’m not an economist, and I have no crystal ball. I have my own ideas on what might happen in one, five and ten years, but like most peoples views I’d say these are no more than informed guesses. Actually, probably not even that informed. And certainly not worth sharing here.
Whatever happens, short of an earthquake, nuclear war, pestilence or some other as yet unforeseen catastrophic event, I am confident that at any point of time you care to pick in the future there will be a property market. And chances are that in 10 years time property values will be higher than they are today. And in 20 years they’ll be higher than they will be in 10 years and so on. Yes, it’s a simplistic model but it seems to have worked well for the last 1000 years or so and I don’t see it changing anytime soon.
No, what I’m suggesting is that it would be irresponsible not to occasionally cast my eye over the investment market and see if there is anything better out there. New opportunities appear. New investment products appear from time to time. Previously restricted activities become available to the wider public. Things become deregulated. Also, asset classes that seem to have been just chugging along for ever, going no where fast, suddenly become flavour of the month.
Necessarily, to make a valid comparison we need to look not just at the potential for capital appreciation and income, but also risk. Some alternative investments offer the potential of spectacular returns if everything goes right, but equally spectacular losses if they don’t. Other alternatives offer so much in the way of security that there is little upside potential for capital returns or income.
As an aside let me say that I find it almost inconceivable that any other type of investment offers anything like the security provided by a carefully chosen, well located property. I realise that not everyone will share that view, but perhaps that’s a discussion for another day.
Bearing these two opposites in mind, that is, return versus risk, I instantly (for the umpteenth time) start to think about new business start-ups. There are two options: starting my own or investing in someone else’s. The former is unrealistic, at the moment I have more than enough property-related business to cope with and wouldn’t have time to start a business from scratch. Someone else’s might be more fun, but I’m reminded of the dot.com boom and bust when all sorts of people were starting businesses which, with hindsight, were just never going to work either as a concept or because the management was poor. I feel very reticent about letting others loose with my hard earned cash. I’ve seen too many claims of “dead certs” and too many friends going bankrupt with administrators and receivers knocking on the door. No thanks.
Well, what about something safer and more “secure” like sticking my money into a high interest deposit account. OK, I said I wasn’t going to get into this argument about “security” and well located properties but I can’t help it. A high interest deposit account might be safe, in the sense that you’re never likely to physically lose your money, but it’s not secure because every day the money value is being eroded by inflation. With a well located property, on the other hand, the consequence of inflation is an increase in the value. Property is a hedge against inflation, cash in the bank is not. Security is just an illusion. Added to that the returns from the interest are usually pretty poor, but worse still, there is no scope for capital appreciation. The amount of cash in your account will not increase because of the market forces of supply and demand. It can only increase by rolling up the interest. With a well located property you can spend the rent on frivolities, if you wish, but still watch your capital increase as values increase.
Then there’s tax. Bank interest is usually taxed at source, unless of course you go off-shore, but being realistic it’s almost inevitable that Gordon Brown and his friends at the Inland Revenue will catch up with you somewhere, sometime. The way you own your properties can be structured so that you do not pay tax on income at source, and in fact through careful scheduling of repairs and the use of interest only loans your tax position can be significantly controlled and reduced. And, I hasten to add, all this is perfectly legal.
So high interest deposit accounts are also out. What about something a bit more exciting like currency dealing, the futures market or commodity broking? By implication you need to know what you are doing, and this dog’s a bit long in the tooth to start out in a new niche. Especially one that is inherently volatile, quick moving and extremely risky. At least when property is volatile, it is volatile slowly. Prices don’t change by the minute, or the hour, or even daily. Most measures are monthly and even then it’s not always easy to get a clear picture of what’s really happening. Look at any graph showing long term trends and you’ll see property prices increasing or decreasing in sweeping arcs. It might not feel that way at the time, but let’s face it, you won’t see 30% wiped off the value of property tomorrow morning, will you? But in other markets, that can and does happen.
What about stocks and shares? How are they looking? Well, again I’m not trying to predict the market short-term or long-term. If I were I’d be interested that I read a couple of months ago that it was inevitable that more switched on buy to let investors will spurn the “low” returns offered by property and put their money into a recovering stock market instead. Now I’m reading that high oil prices mean a faltering stock market has possibly peaked (and still well below the highs of 6 or so years ago) and could be about to head back down again.
What about Government Gilts? True, there’s the potential for income and capital appreciation, so in that sense they are preferable to a deposit account, although not as liquid. These could be a realistic alternative to some property investments bar one thing. And actually, that’s one thing that is common to all these other types of investment.
Gearing. Of all types of investment, property is without a doubt the easiest to gear. In some situations it might be possible for some of us, depending upon our experience, wealth and contacts to gear shares. But if Joe Average walks into a bank and says he wants to borrow fifty grand to buy shares a laughing bank manager is going to show him the door. On the other hand if he asks for fifty grand to buy a buy to property, the banks will be falling over themselves to get his business.
This is why, in my humble opinion, returns from property will always beat the returns on any other type of un-geared investment. And this is why, in my equally humble opinion, it is spurious to compare gross returns from property with the gross returns from other types of investment.
You would think that all professional investors would know this. Perhaps they do, but at times it suits their purposes to over look it. I couldn’t help raising an eyebrow a few years ago when I read a short article paraphrasing a recent report from the Pensions Policy Institute. Now, I have to admit I didn’t read read the original report, and the article was of necessity brief, and might not fully reflect the conclusions of the report itself. Here’s the article in full:
“Britons hoping their homes will provide an alternative nest-egg to a pension are mistaken, a report has said.
Rather than choosing property over pensions, most people – even in wealthy areas – will need both, the Pensions Policy Institute (PPI) has said. While pensions have suffered and house prices have boomed, the PPI says pensions are better in the long term.
Pension funds have risen by an average of 11.6% a year since 1970, while homes have grown by 11.1% a year, PPI said.”
This is a classic example of what I am talking about. Obviously it goes without saying that there’s a certain amount of self interest in the PPI putting forward this view but some pretty basic questions need to be asked. Do they really mean homes, or other properties held as an investment? How have they measured the performance of pension funds and property? Does the return from pensions include re-invested dividends? Do the returns from property reflect only capital appreciation, and so are they comparing like with like? Why do they choose 1970 as a comparison date? Presumably because, and I don’t know this and perhaps I’m being too cynical, because that’s the only period that proves their point? Perhaps if they chose 1960, or 1980 or 1990 property would win hands down?
But, of course, you and I know that comparing gross returns does not give a full and accurate picture. Although you might deposit lumps of cash into a pension fund and not gear up, in my opinion no one in their right minds should buy a property for cash and not gear up. Anyone who had geared up their funds to buy property in 1970 will by now, no doubt, be multi-millionaires. Especially if, as the equity in their properties grew, they refinanced and geared up again and again to buy more and more properties, all of which would have been appreciating in value.
On the other hand those who invested purely in a pension fund might have been thrilled by the initial tax break they received, but are now probably looking at their inflation ravaged returns, and the relatively pitiful return from the annuity they have had to purchase with it, and are wondering whether they could have done better elsewhere.
And think of this. When buying any other type of investment, what you pay is usually the value. When you buy shares on the stock market, you pay the price the broker quotes you. And that price is, as near as it can be, the value of the share as determined the laws of supply and demand. If Joe Average starts haggling with his stockbroker over the price he’s not going to get anywhere quickly. If Joe Average buys units in his pension fund, the price is the price.
With property, on the other hand, it is entirely possible to negotiate what you might consider to be a bargain price. It is entirely possible that by doing your homework and by doing some shrewd dealing, you can buy property at below its true market value and make an instant paper return, or a real return if you are able to sell it on at full value.
So by combining the power of gearing, and the opportunity to buy “below market” with the opportunity to benefit from capital appreciation and income, I can’t see any other type of investment promising enough to distract me away from property at the moment. And I haven’t even started telling you about returns from improving and modernising properties, or from improving the management.
No, as far as I’m concerned, whatever short-term rough seas we might encounter, I’m keeping both feet firmly planted on the good ship Property Investment and am steering a steady course to a highly geared, but selectively chosen, property portfolio. As far as I’m concerned, there’s nothing to beat it, yet.
Here’s to successful property investing
Peter Jones B.Sc FRICS
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