Residential property is now a two-way street. An asset that used to be viewed as something in which you invested your income in order to create capital has become a capital asset that people are putting equity into in order to obtain an income.
When we first started to look at residential property as an investable asset class 25 years ago, it was deeply unfashionable. There was only a tiny, vestigial market rented sector left in the UK, following regulation-induced asset disposal by investing institutions. At that time the flow of occupier behaviour was away from tenancies and
into ownership. This trend began to reverse at the millennium so
that in future it might come to be viewed only as a late twentieth century phenomenon.
Mortgage rationing
Conventional wisdom has had it that housing values are determined by two main variables: household incomes and mortgage interest rates. Low-income growth and high rates meant weak or falling house prices; high-income growth and low interest rates meant rising house prices. Any recent analysis of the UK housing market since 2007 has shown that there is a third component in this model – the supply of debt finance.
Post credit-crunch a new form of mortgage rationing, forgotten since the 1970s, has re-emerged. The imposition of very low loan-to-value ratios and stringent qualification of applicants has created a major barrier to housing accessibility. The cost of deposits has overtaken the cost of debt repayments as the issue determining affordability.
The subsequent growth in the number of market-rented properties over the last five years has reminded us that the new property world is dominated by cash and not borrowing.
But what is the value of the income to the owner? Tying up cash in an asset like housing is only worthwhile if it produces a return greater than that available elsewhere – at equal or lower risk.
Finding hidden value
For most owner-occupiers and private investors, there are very few alternative investments that are genuinely ‘as safe as houses’. Those that exist are very low yielding. Consequently, any asset with a net yield north of 3% and with the prospect of longer-term capital growth looks compelling.
Not so for many corporate and institutional investors who still try to value residential property on the same basis as commercial properties. But commercial property returns are more volatile, show low rental growth and depreciate at a much faster rate than residential. IPD analysis shows that risk-adjusted total returns have been higher for residential property and we think this will remain the case in future.
Investment yields will be reset in the next few years as a consequence, and residential property will be increasingly favoured by corporate investors. This means we expect to see increasing capital values for investment properties, especially as rental growth further boosts income streams. As a result there are big opportunities for new investors who understand which stock will perform in this environment and what is currently mispriced – and how to find hidden value. After 25 years, it looks as if the time for residential investment has finally come.
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)