INVESTMENT
OVERSEAS RESI INVESTMENT
Overseas residential property might represent, in some cases, a much more attractive proposition than UK buy to let. Several markets are offering much higher yields; for instance in Dubai 12-13 per cent is achievable, while many US markets offer substantial income returns. Atlanta and Detroit, with government-backed rental markets, offer strong yield together with recovery potential.
HIGH YIELD COMMERCIAL
UK commercial property offers much higher yields. On some recent corporate transactions, initial yields of 12 and even 16 per cent have been reported; the average is lower, but even so is nearly double the income return on residential at 6.2 per cent against 3.4 per cent (annual, to June 2011). While industrial properties offer a slight edge, with seven per cent yield, all three major classes of commercial property trade around the same level. However, investors have been looking beyond those three classes to improve their yield. IPD noted in its mid-year report that the ‘other’ segment of property, which includes healthcare properties, student accommodation, and hotels, has seen increased investment
With base rates stuck at 0.5% you may
think ‘houses -vs- cash’ is an open and shut case...’
However yield is a dynamic figure. At the
start of the credit crunch, many companies cut their dividends as they simply couldn’t afford to pay. Banks were affected by the economic environment, while BP was forced to shelve its dividend after the Deepwater Horizon disaster. In the past twelve months, though, equity dividends on the FTSE 100 have risen 9.7 per cent. That’s comparable to residential rents, which have also risen over the past year. LSL Property Services says residential rents have risen 3.5 per cent year-on-year to November 2011, though that’s a deceleration from earlier, higher levels. Compared to that, commercial rents
Commercial property yields are around 6.2%.
recently – more than either regional or City offices. IPD believes this reflects investors’ decision to diversify their portfolios; these are also high yielding sectors, though, so it’s also likely that investors are chasing higher returns. (Healthcare has also been an attractive property sector for stock market investors seeking yield, with Primary Health Properties, for instance, yielding 5.7 per cent; its share price has fallen marginally this year, a much better performance than the market.) The comparison against shares is even
more difficult to make than against commercial property. One way to assess value is to look at the dividend yield on shares, which currently stands at around 3.6 per cent for the FTSE 100 top shares index, bang in line with 40 year average dividend yield on the FTSE All Share Index, as it happens.
have been weak, particularly outside London. IPD says that High Street retail, outside South-East England, has seen a 10.6 per cent fall in rents. Even though many leases retain the condition of upwards-only rent reviews, with a high rate of insolvencies, there’s a certain amount of portfolio churn, and new tenants appear to be paying lower rents as well as, in many cases, getting initial rent-free periods and other sweeteners. Rentright, which produces a rental
property index, says average rents in England have risen from £1186 a month in November 2010 to £1414 in November 2011 – a 16 per cent increase. That beats other investments hands down over the year, though rental prices did slacken in December 2011. While in theory the value of an
investment is the net present value of its income stream – that is, it should be valued purely on income – capital growth is responsible for an important part of the total return to the investor. That’s where IPD’s figures are useful in setting residential property in context. Its 2010 residential index (the most
recent full research available) shows that though residential lets underperformed commercial properties on income return, returning only 2.8 per cent against 6.4 per cent, in total returns terms they have been better performers over both the last three, and last ten years.
2010 RESIDENTIAL INDEX All residential lets +1.3
Commercial lets Equities Bonds
Infl ation
-2.5 +1.4 +7.7 +2.7
Last 3 years Last 10 years +10.1 6.8
+.3.7 +5.9 +2.9
PROPERTYdrum FEBRUARY 2012 15
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