Amid a backdrop of economic uncertainty, the value of property investment over more traditional investment asset classes can be the key to securing strong and stable returns.
Volatility across global stock and commodities markets this year have made for a roller coaster start to the year. Despite oil rallying by more than 50 per cent since hitting 12-year lows less than two months ago, analysts and economists remain sceptical about what, if any, long term effect the agreement by some countries to freeze production will ultimately have.
The effect of volatility
If we look at how certain asset classes have performed in the United Kingdom over the past decade, we see that property has proved more stable than fluctuating commodity and equity markets. Property prices also dipped less and rebounded more quickly following the 2008-2009 downturn, subsequently reaching historic highs in 2012. Meanwhile, commodity prices have sunk to levels lower than they were ten years ago, and the FTSE 100 has only recently returned to pre-financial crisis levels. Investors are becoming increasingly aware of this divergence in performance. The stability and resilience of property continues to drive the sector forward as a key investment asset class.
Not all property markets are equal
For investors looking to put their money into real estate, it’s important to look at stable, mature markets such as the UK or Australia, and to consider five- to ten-year investment cycles that offer the opportunity for sustainable capital growth and steady yields. Real estate in safe-haven markets is particularly attractive to those living in more volatile property markets such as the UAE, where prices will continue to suffer this year, according to KPMG.
Although the economic outlook for the year ahead may be uncertain, past performance has shown steady growth in property investment activity during economic downturns, which coupled with low interest rates can mean good prospects for investment returns.
The London factor
Property prices in the UK capital did fall back down to levels from two years previously following the 2008 global financial crisis, but they quickly regained their value, and have continued to grow steadily ever since.
According to RICS data, UK house prices continue to rise amid current market conditions. Knight Frank is similarly upbeat, expecting residential price growth in the UK between this year and 2020 to reach 20.5 per cent. Savills expects growth of 17 per cent over the same period, with up to 22.2 per cent forecast in prime areas of UK regional cities.
But even within safe-haven markets, not all postcodes or price points are equal. Prime Central London property has become less attractive recently, with investors turning their attention to the better value and higher yields on offer in outer London, particularly across sites close to future Crossrail stations.
A safe bet
Certain areas and sectors – particularly luxury real estate – are most susceptible. The prospect of even a modest drying up of investment from Russia and the oil-producing countries of the Middle East will only compound this trend. As investment resources become constrained, more buyers will begin looking outside the prime real estate areas of historic Central London in search of secure and steady price growth.
When comparing asset classes, property’s potential for combining capital growth with high yields that deliver strong returns over the course of the investment makes it the safest bet of all during periods of economic volatility.
Richard Bradstock is the director and head of Middle East at IP Global