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London Update December 2007 How do you Balance a Portfolio How do you Balance a Portfolio – Paula Hawkins There is, of course, no typical private investor, although there are plenty of financial advisers out there telling them how they should be structuring their investment portfolios. Many will advise the small investor to put somewhere between 40 and 60% of their money into equities, depending on their appetite for risk. They will also say the rest should be shared between bonds – around 30% for a cautious investor, 20% or less for a more adventurous one – with the remainder invested in alternative assets, like property, commodities, gold and cash. The question of which assets deliver the strongest returns is a notoriously tricky one to answer; the solution most often offered by investment advisers is to hedge one’s bets: put money into a wide range of assets in order to reduce your risk. But this simply raises another question: how much money should you devote to each asset? Should you be overweight in equities, underweight in bonds? How much of a role should ‘alternative assets’ – things like commercial property, gold or commodities – play in a typical investment portfolio? In seeking advice, the first port of call for most private investors is an Independent Financial Advisor (IFA) or high street Bank. These tend to focus on the more ‘traditional’ asset classes; cash on deposit, shares and off-the-shelf funds. In the fast paced naughties time is scarce, yet few places offer investment advise spanning equities, property and alternative investments (eg. wine and collectibles). Investors who want access to a full range of asset classes must typically find more than one advisor, and so must decide how they split their asset allocation themselves. In studying the asset allocation of institutional investors, (figures are publicly available), the average pension fund devotes the vast majority of its money to equities and bonds, with alternative assets making up a very small part of its portfolio. According to the 2006 figures from Mercer, the average UK pension fund had 61% of its assets invested in equities, 36% in bonds and just 3% invested in other assets. The average European fund is more heavily invested in bonds, which make up 54% of portfolios, with 42% invested in equities and 4% in alternative assets. 'private investors have a considerable appetite for property'
When advisers and institutions talk about property investments, they are almost always referring to commercial property only. This is perhaps the most stark difference between small investors and institutions: while retail investors have a considerable appetite for property, institutional investors have traditionally shied away from residential property investment. This is partly because most residential property is too small to interest a pension fund. The average value of a residential property in the UK is £183,000, whereas the average value of a commercial property, according to the Investment Property Databank (IPD) is £15.8 million; making commercial lots far more suitable for institutional investors. In addition, the purchase and management of residential property is more onerous from an administrative point of view, and while an investor in commercial property will pass on full responsibility for maintenance and insurance to the tenant, with residential property, these costs are met by the landlord. Income from residential property is also less secure than the income earned on commercial property because rental agreements usually last for six months to a year, while commercial property leases tend to be for much longer periods. Another way to gain exposure to property investments is through property funds, but these have their drawbacks too, most importantly is that they are not efficient from a tax point of view. Money invested in property through a fund is effectively taxed twice: once when the property company pays corporation tax, and a second time when the investor pays income tax on the dividends and capital gains tax on their profits. And while investing in real estate investment trusts (Reits) allows investors to circumvent the tax issue, Reits have their drawbacks, too. Because they are listed on the stock market, their prices are subject to the vagaries of stock market swings. Private investors in the UK do like residential property - largely because they have seen their homes appreciate – and this has fuelled the buy-to-let boom of the past decade. However, it is notable that many financial advisers do not recommend residential property as an investment, arguing that most people already have exposure to the residential property market through their own homes. But one of the great advantages of direct residential property investment is the benefit of gearing. Using mortgage finance to fund the investment exaggerates the return on cash invested, meaning that returns from property investment conservatively geared at 75% have outstripped equities by a factor of four over the past 20 years. The aim of diversification is to spread risk; in other words, what investors need to identify are not just different asset classes, but asset classes that are not correlated with each other. In other words, what you want is to pick types of investment which thrive in different economic conditions. But most assets are correlated - and they are becoming increasingly so. Mark Dampier of Hargreaves Lansdown, the financial advisers, says: “True diversification has become harder and harder to achieve as asset classes have converged. There has been huge yield compression in recent years.” According to ABN Amro, the investment bank, the correlation between commercial property and equities has shot up from 30% in 2005 to 63% today, which makes it a “less attractive diversifier in a multi-class asset portfolio”. Moreover, there is no guarantee that supposedly non-correlated assets will always move in opposite directions. “Bonds usually offer some degree of diversification, but not always,” Mr Dampier points out. “In 1994, at the time of the equity market rout, bonds lost 20% with the rest of the market.” However, there have been times at which a diversified strategy has paid off. For example, during the bear market which lasted from August 2000 to January 2003, the FTSE All Share lost 43% of its value, while private equity funds lost around 32% and the Goldman Sachs Commodity index fell 8%. Over the same period, the FTSE British Government All Stocks, an index of gilts, rose by 12%, while the price of gold rose 17%. Property performed best over this period, with the IPD’s UK All Property index (commercial property index) rose by 22%, while house prices increased by 45%. 2006 is another case in point. Cautious investors fared poorly, with gilts losing 4.4%, corporate bonds falling 4.5% and cash returning just 0.4%, according to the Barclays Equity Gilt Study. Equities did relatively well, returning more than 11%, while UK residential property returned 16.8%, and UK commercial property 18.1%, IPD figures show. Diversification is clearly important and in deciding how much to allocate to each asset class, it is imperative to take good advice in order to understand the options available; their historic returns, the risk involved and the factors that impact on their performance. One would not buy a car without test driving it, nor book a holiday without knowing which country one was off to! Compared to property and most alternative investments, stocks and shares are more intangible, as well as being subject to a plethora of complex economic and market vagaries. Personal pensions are similarly intangible and their poor performance in recent years has led to investors abandoning pensions in favour of property; an investment class that is easy to understand and relate to. Written by Paula Hawkins – Paula writes on the residential property market for a range of national newspapers including The Times, The Independent, The Sunday Telegraph and the Evening Standard. Paula has also written a guide to personal finance, published by Penguin Books.
Mark Twain famously said ‘Reports of my death have been greatly exaggerated’; the same can be said of the buy-to-let industry. Young Index data shows that investor sentiment remains extremely healthy, particularly in the capital. Young Index figures show that almost all investors (93%) intend to hold their property investments throughout 2008, and when it comes to increasing their holdings, it is clear that market confidence is concentrated within the London market. Confidence in the capital outstrips that for the rest of the UK by five times; a consequence of the continued undersupply of property in the capital and London’s dominant position as the world’s leading centre for Global business and finance. Over the next 12 months, 54% of investors expect to buy additional properties within London, compared to just 10% who intend to add UK property situated outside of the capital to their portfolios. The picture is the same from a price point of view; 82% of investors believe that property values in London will rise or remain static. This compares to just 37% of investors expecting the price of UK property outside of the capital to rise or remain static. The figures indicate that a staggering 91% of investors claim not to be influenced by media reports and 93% investors would not consider exiting their property investments in order to increase exposure in other asset classes. Of those, 3.7% would hold the funds as cash, presumably in a bid to evaluate the market before reinvesting. Only a fraction (1.3%) of investors would invest in equities over property and alternative investments such as art, motor cars and fine wines (1.2%). Commenting generally on the buy-to-let industry, Neil Young explains: “Buy-to-let is a recently coined term for what is essentially one of the most established business practices in the country. People have been renting homes from landlords since the earliest days of property ownership. The practice has taken off in recent years as a result of the development of buy-to-let mortgage products making it easier to access funds. Assured Shorthold Tenancy legislation, introduced under the 1988 Housing Act, has also contributed by bringing an element of clarity and regulation to the process of letting property. However, the principal of buy-to-let itself is not new and has proved to perform exceptionally well, despite inevitable short-term fluctuations in economic and market conditions. “We always urge investors to take a long term view and ensure that they are financially able to accommodate any short term fluctuations in market conditions that may occur. The Young Index results clearly show that buy-to-let investors continue to have confidence in the sector.” For a full breakdown
of the latest Young Index Elephant & Castle Partners on the Road Six months after their selection as Southwark's regeneration partner, Elephant and Castle developer Lend Lease is embarking on a 3 month programme, working with community groups to set out the next steps in the area's renewal.
The Regeneration of Elephant & Castle Continues Regeneration is already progressing; First Base will start building its 44-storey tower on the London Park Hotel site in the New Year, containing 470 properties, a café and a new home for the Southwark Playhouse. St George's Vantage Metro Central residential development on New Kent Road is well under way and The Oakmayne Plaza scheme on New Kent Road/Elephant Road, which includes cinemas, shops, restaurants and student accommodation is due to be considered by the council's planning committee this month. Heron Quays Plan Announced
Proposed: Heron Quays
West Canary Wharf Group has submitted revised plans for the Heron Quays West site. The proposals see three linked hi-rise towers rising to 12, 21 and 33 storeys. The Rogers, Stirk, Harbour and Partners design features more than 2 million sq ft of office space and a further 27,000 sq ft of retail space. The ambitious project application proposes the partial in-filling of the South Dock to extend the site into the dock area and would accommodate as many as 7,500 workers. A pedestrian link to Jubilee Place Mall, the Jubilee line station and a public open space is also proposed.
ECONOMIC UPDATE & MARKET COMMENT UK Inflation Holds Steady at 2.1% Goldman Sachs Prepares Bumper
Christmas Buy-to-Let 12 Month Round Up Lending Remains Buoyant for Buy-to-Let In addition, the percentage of buy-to-let mortgages in arrears by three months or more stands at just 0.61%, half the level recorded for all types of mortgage. The CML states: “This is the last month we expect lending to be higher than a year ago as lenders and borrowers behave more cautiously. We expect the lending figures to be driven more by supply factors rather than lower consumer demand.” The October figures challenge fears that the buy-to-let sector will be particularly vulnerable during an economic slowdown. Canary Wharf: A Done Deal Mogul Picks Residential Portfolio London Leads UK 2008 Price Growth
Forecast
Lettings at MyBASE1 Without signed terms, we are unable to
move tenants in.
SEASON'S GREETINGS from YOUNG GROUP
As the holiday season draws near, we’d like to take this opportunity to send our best wishes to you and your family and to let you know that our offices will close at 5:30pm on 21st December and reopen at 9am on 2nd January 2008. In lieu of mailing cards, we have made donations to our two nominated charities, Norwood and Children with Leukaemia. Wishing you a happy, prosperous
New Year Young Group specialises in providing Property Portfolio Management services to private investors, identifying the best off-plan opportunities in London on their behalf and managing the entire investment process - from sourcing the property through to financing, furnishing and letting. Young Group is a wealth manager with a focus on property as an asset class. Young Group owns all the property it sells, and also retains a number of properties in each development for its own portfolio. As the principal in every transaction, Young Group does not realise any profits until completion, giving investors 100% confidence that properties will ‘value up’ and that financing will be secured. Young Group has transacted in excess of 1,500 apartments, with a retail value of £630 million. Over 50% of units have been bought by multiple investors. The Group’s lettings division, Young Lettings, has successfully let all investors’ apartments within a week of completion. For each property exchange, Young Group
donates £50 to CHILDREN with LEUKAEMIA, the UK’s leading
charity dedicated exclusively to fighting Britain's biggest childhood
cancer through pioneering research, new treatment and support of children
with Leukaemia and their families, and to Norwood, the Children and
Families First charity which provides support to families facing social
difficulties. t: +44 (0)845 356 1000 e: info@younggroup.co.uk |
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