Your home is often your most valuable asset and declines in house prices can cause major worries.
Recent reports in the UK have warned that rising interest rates will spark a slump in property prices, resulting in negative equity, more people defaulting and a host of other unpleasant consequences, such as recession.
However, for the investor, property continues to offer significant opportunities. The recent fall in prices may add to the attraction.
Property investment can take several different forms. Home ownership is a form of property investment, even if the buyer bought it as somewhere to live, rather than a way to make a return. Going one stage beyond that, some people choose to buy one or two additional properties. By renting them out, they have a buy-to-let business, and these can often grow to sizeable proportions.
The more indirect methods of investing in property include buying shares in a property company or a fund. This can be a fund which invests in properties directly, or one which invests in companies that invest in properties. This can be commercial as well as residential properties. One attraction of buying into shares and funds is that it can circumvent the liquidity problems associated with buying and selling property.
Resilient to challenges
All of the above investments are encountering challenges, but many pundits remain optimistic about prospects for the sector.
An article in Yahoo! Finance by Eric McConnell, focusing on the United States, examines some of the reasons people might be reluctant to invest: supply chain problems, inflation, and a volatile stock market. McConnell also points to the Federal Reserve having raised interest rates several times.
“So it only makes sense that you might have some doubts about real estate investing,” says McConnell. But, "Throughout history, real estate has been and will continue to be a strong investment option.”
Property owners looking to sell means investors can buy in at bargain prices, says McConnell. He says a shift in population to the Sun Belt states, such as Texas and Florida, has created opportunities for investors.
UK buy-to-let market
UK house prices had been rising strongly for several years, but this pattern may now be changing. The closely watched Halifax House Price Index fell 0.4% in October, the third decline in four months.
However, buy-to-let investors are still benefiting from a strong rental market. Rental income for the average UK landlord rose 18% in the past year, according to an FT Adviser article by Jane Matthews, which cites data from specialist rental platform Ocasa.
The numbers show the resilience of the sector, says Ocasa's sales and marketing director, Jack Godby, quoted in the article.
“Like any area of the property sector, investment levels, property prices and rental values can vary drastically from one region to the next and this understandably has an impact on the size of a buy-to-let portfolio, the rent achieved per property and the overall return made. However, it’s clear that strength is building across the market with respect to an increased level of income.”
The average portfolio size in central London is among one of the lowest at just 8.3 properties, according to Matthews. However, central London “had not only seen the largest levels of rental income, but also seen the largest increase in this level of rental income,” she writes.
The average buy-to-let portfolio in central London delivers an estimated £93,890 in rental income per year, up 42% on a year earlier, according to Matthews.
Property funds showing a less upbeat picture
The Schroder Global Cities Real Estate Fund, which invests in equities of real estate companies worldwide, had returned -19.7% in the year to end-October. This follows a strong gain of 25.8% in 2021 and is in the context of a cumulative gain of 82% over the past ten years.
Likewise, the Janus Henderson Global Real Estate fund was down 29% YTD as of 9 November. The fund commentary notes that global property stocks fell 11.6% over the third quarter, underperforming wider equity markets. It adds: “Investors in property are looking for market evidence to better understand the magnitude of pricing adjustment needed to reflect higher funding costs, at the same time as a weakening global economy has made rental income streams harder for investors to underwrite.”
Henderson’s commentary also brought up the long-standing issue of property shares trading at a steep discount to their underlying asset values, due to swings in market sentiment. The commentary says that shares trading at “wide discounts” reflect “a highly uncertain environment” but that this “may overlook the attractive, reliable and growing income streams that many real estate companies can generate for investors”.