Property investment is often viewed by many investors as an invaluable asset class in their diversified portfolio.
The UK property market is gaining momentum and shows no signs of slowing down. IPD numbers show that in 2014, the UK property market returned 17.8 per cent.
In the majority of cases, portfolio allocation to property investment has neither increased nor decreased compared to five years ago, according to a survey commissioned by Financial Adviser to gauge how they are used by industry professionals.
Of the 442 financial advisers, paraplanners, wealth managers and respondents from a variety of occupations who took part in the study, 44 per cent said they had maintained their allocation to property investment.
Just under a third of respondents said they had increased their allocation by up to 10 per cent, 39 by between 10 and 20 per cent and 20 by more than 20 per cent.
Conversely, one in 10 said they had decreased their allocation over the same time period.
Buy-to-let has become an attractive proposition in recent years thanks to low base rates and market volatility.
However, 38 per cent of respondents said they were not very likely to recommend BTL to their clients as an investment over the next 12 months, while just over a quarter of the sample said they were not at all likely to recommend it.
On the other hand, around 24 per cent said they were quite likely to recommend the proposition, and 7 per cent said they were very likely to.
The UK commercial property marketplace is poised to be a lucrative opportunity for investors, according to Andy Brunner, investment strategist at Morningstar OBSR, who is predicting double-digit returns.
He said: “The fundamentals for UK commercial property suggest returns from the asset class could exceed 10 per cent for a third consecutive year in 2015. Commercial property offers a very high starting yield, the prospect of solid capital growth and a pick-up in rental growth in the year ahead.
“Income is tremendously important to UK commercial property total returns. From 1987 to date, the IPD All Property index has produced a total return of 900 per cent (9.0 per cent a year), of which income has contributed nearly 80 per cent and capital values just 20 per cent.”
London Central Portfolio, Residential Fund and Asset Managers have already seen a number of enquiries from Swiss-based wealth managers and potential investors looking to move their money into central London real estate.
This follows the shock removal of the EUR/CHF floor in January and a further cut in the deposit rate from -0.25 per cent to -0.75 per cent by the Swiss National Bank.
Claiming that the changes may presage a new international investment dynamic in this market, Naomi Heaton, chief executive of LCP, said: “A flow of safe haven-seeking investors from Switzerland have already begun to focus on central London, which has, in the blink of an eye, become substantially cheaper for them.”
The survey findings reflect this view, as 305 survey respondents said they would invest in property in the UK over the next 12 months.
Only seven said they would buy a property in the US over the same time period.
As many as 48 per cent said they would buy a property in London and the South East, and the figure was around 14 per cent for Scotland.
There were, however, 101 and 82 survey participants who said they would invest in property in Europe excluding the UK and Asia Pacific countries respectively.
David Wilson, managing director at NE Money Limited, based in Tyne and Wear, said more and more people were investing in property in the northern parts of the UK.
“We find that people are looking to invest in properties up north because it is cheaper than what it costs down south and has much better yields.”
He added that the new pension freedoms, due to come into effect in April, would attract more people to property investments.
He said: “I think people feel more secure in investing in property, despite what has happened in the marketplace in the past eight years.
“What people need to remember is that if they are going to invest in a property, they will have to manage it themselves. With pensions, control is very much on the person who is managing the individual’s investments. That person would charge a management levy for their services.
He added: “People will need to beware of the ‘accidental’ costs that come with property investments. They are not just buying four walls with a cash machine.”
However, only 1.4 per cent of respondents said the pension freedoms had generated a lot of interest in property investment, while another 14 per cent said they had generated quite a lot of interest.
Just under half of respondents said only a little interest had been generated, while 171 said there had been no interest.
Generally speaking, the property asset class as a whole is very sensitive to activity in gilt yields – if the latter goes up so too does the cost of debt.
The majority of survey respondents – 220 – said that a 50bps rise in 10-year gilt yields would have no effect on property values.
Only 37 said it would result in an increase, while 52 said it would cause a decline in property values.
Interestingly, just under a third of respondents said they were unsure of the impact of the 50bps rise.
Kiran Patel, chief investment officer at Cordea Savills, said a 50 bps increase in gilt yield would result in an increase in the rate of interest, and therefore the cost of debt.
He added: “A bumper interest rates payment would result in less net rental income because the individual would need more cashflow to service debt requirements.”
Myron Jobson is a features writer at Financial Adviser
Key points
The UK property market is gaining momentum and shows no signs of slowing down.
Income is tremendously important to UK commercial property total returns.
The new pension freedoms, due to come into effect in April, will attract more people to property investments.
