Compare the market
Andrea ‘Meerkat’ Kirkby checks out
the attraction of property over other assets.
R
esidential property has made some people fortunes – and it’s bankrupted others – since the credit crunch. While many
invested in property believing ‘bricks and mortar’ were safer than the stock market, that’s not necessarily been the case. Although buy to let property, and
overseas properties in particular, are now increasingly sold on the basis of rental yields, residential property is still not as well researched as commercial property and other asset classes. Newspapers and financial web sites devote pages to discussing house prices - but there is rarely any discussion of total returns, or rental yields, making it difficult to compare with other assets.
14 FEBRUARY 2012 PROPERTYdrum
So how does residential property
compare with, say, quoted shares, or warehouses, or cash? With base rates stuck at half a per cent, you might think ‘houses versus cash’ is an open and shut case. However, investors can get much better returns on their cash balances by looking for a good fixed term account. Currently, the best five-year fixes are returning as much as 4.7 per cent, while IPD, the property research house, says residential rentals are yielding 3.4 per cent. And with cash, there is no possibility that the nominal value of the deposit will fall – whereas house prices might. Equally, of course, house prices might go up, in which case the total return on property would probably equal or surpass cash. But no one
is forecasting more than a two per cent rise in house prices next year, so it seems unlikely that this will make a huge difference. By the way, one interesting feature of the
current interest rate environment is that Libor, the rate at which banks borrow from each other, has historically tended to be set at about 20 basis points above the base rate. Since the credit crunch, though, it’s been much higher – in December 2011 it stood at 1.07 per cent, or 57 basis points above base rate, nearly three times the historical average. That may sound pretty technical, but what it means is that banks think the Bank of England’s base rate is too low. They think there is substantially more risk in the market than half a per cent suggests.
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