INVESTMENT
THE BEAUTY OF BONDS
Over the last three years, equities have marginally outperformed. But the stand- out performer was bonds, as economic recovery lowered the risk of default, and yields shrank to record lows. For that very reason, bonds cannot possibly match that performance over the next couple of years; and yield investors should note that not only is the yield from investment grade bonds now very low, their capital remains at risk (which is not the case with cash deposits). Only double-B bonds and worse credits
(double-B is the best rating of junk bond) still show more than respectable yields; 7.3 per cent for double-B and 10 percent for the junk bond class as a whole. Meanwhile, yields on UK ten-year gilts (government bonds) are below two per cent.
BEATING INFLATION
What hasn’t been mentioned so far in this article is inflation. Though investors who have had their fingers burned in property or the stock market may prefer to hold their wealth in cash, where the capital value isn’t at risk, inflation is gradually destroying the value of their money. Despite recent falls, inflation is still nearly five per cent, so even on the best fixed rate, investors are seeing a 0.3 per cent fall in the purchasing power of their savings – and that’s before tax. Residential property investment, on the
other hand, narrowly beats inflation if you take LSL Property Services’ latest figure for yield of 5.3 per cent. Though with average prices falling this year, the total return will be lower than that. Of course the difficulty with looking at total return is that we’re back at the
beginning of a circular argument, trying to predict house price rises for 2012. But at least, along the way, we have a richer idea of exactly how the return on residential property is made up, and how it compares to other assets.
There’s increased interest in non-standard accommodation – student halls and hotel rooms.
STUDENT SCHEMES Just as commercial property has seen investors targeting non-mainstream properties in search of better yields, residential property has seen increased interest in non-standard accommodation such as student halls of residence and hotel properties. Let’s leave aside bamboo and other eco-investments, which are also proving popular with sophisticated retail investors. Yields for student accommodation are
Student schemes give impressive yields. 16 FEBRUARY 2012 PROPERTYdrum
typically higher than for other residential property, starting at six per cent and with some schemes offering yields as high as
9-10 per cent on purpose-built accommodation. A number of funds specialising in student accommodation have also been set up, for sale through IFAs, some of them targeting returns in excess of 12 per cent per year.
A BED FOR THE NIGHT?
Hotel properties are also popular with institutional investors, and an increasing number of schemes are being offered to make hotel properties available to the retail investor. Yields of six to 10 per cent are quoted, though initial yield is generally lower; it takes some time to build up
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