Should you reweight your investment portfolio?
Increasing numbers of economists are coming around to my point of view – interest rates in the UK are unlikely to rise before 2019. It means that your investment portfolio could come under increasing pressure to make worthwhile income. Especially with inflation rising (it’s currently at 2.6%), traditional income-producing assets such as government and corporate bonds can’t be relied upon.
Investing in property could be your saviour, and if you haven’t allocated some of your investment portfolios to residential property already, you should consider doing so. While low interest rates put pressure on bond coupons and share dividends, they tend to inflate property values.
What assets could you invest in for inflation-beating yield?
There are several assets that you could consider for high yield. These include high yield corporate bonds, emerging market bonds, and shares. Each of these assets could provide income above inflation, but the risks are very real. For example:
- Fixed income assets don’t deliver as high a yield as property.
- Low-interest rates have helped to push share prices up and bond yields down.
- Share dividends can’t be relied upon – if the economy falters, corporate profits could fall, and dividends could be cut.
- If investing in emerging market debt, not only do you have to contend with the possibility of default, but also the associated currency risk.
Shares and bond prices have been pushed higher by low-interest rates. The higher these prices go, the harder the crash could be when it comes.
An easy way to increase the yield on your investment portfolio while diversifying and reducing risk to your capital is to invest in residential property. Rental yields on residential property are higher than yields on shares, government bonds, and corporate bonds. And, when compared to assets such as shares, UK residential property is far less volatile – even in the recent ‘great recession’ caused by the Global Financial Crisis, UK property prices fell by only around 15% while the stock market halved in value.
Benefits of property investment compared to other assets
As well as higher yields, property investment has several other benefits compared to investing in other assets such as shares and bonds.
You can leverage your investment to increase returns
One of the major advantages is the ability to leverage – borrow money to invest. It increases your potential returns. Especially in this low-interest rate environment, the interest payments on buy-to-let financing are low. It means your yield gap (the difference between interest payments and rental income) is bigger, and this increases your total return (income and capital gain).
Property is a good hedge against inflation
Unlike shares, the physical nature of residential property investment increases its attractiveness as a hedge against inflation. When you buy the best property available in the best places to invest in property UK, you should benefit from a consistent and highly predictable income. Over time, you will increase rents at least in line with inflation.
Between 1996 and 2016, the basket of goods as measured by the Consumer Prices Index rose by 73%. Wages rose by 90%. Meanwhile, the average house price rose by 273%. If the rental yield on residential property were 6% in 1996 and 6% in 2016, rental income would have increased from £3,310 to £12,356. Little wonder then, that many professional investors are choosing property over pensions for their retirement planning.
Flexibility and control to match your investment goals
As an investment asset, residential property is highly flexible. For example:
- It can be used to provide high yield passive income.
- Over the long term, property investment has been proven to produce excellent capital gains.
- You can borrow to invest, further enhancing these returns.
- You can have your property managed by a dedicated investment property manager, thus alleviating you of the day-to-day responsibilities of being a buy-to-let landlord.
- You can invest in different investment structures (e.g. partnerships, sole investor, with spouse or partner, or as a limited company) to maximise returns and minimise tax.
- You can invest in different locations, therefore diversifying income and growth between different local economies.
When you invest in shares or bonds, you are at the mercy of the controlling government or company. When you invest in residential property, you are in control.
In this article, I’ve outlined why you should invest a significant portion of your investment portfolio in residential property. As a summary:
- The low-interest rate environment, which is likely to continue for at least another 18 months to two years, is likely to be supportive of property prices.
- If you are an income seeker, the yield gap is likely to remain wide.
- You can multiply the yield and growth on property investment by careful use of leveraging.
- Other assets such as shares and bonds are looking increasing heavy in their valuations.
- Property is a good hedge against inflation, and a more stable investment than paper assets.
Isn’t it time you reviewed your investment portfolio, to assess its returns and how they measure up against your needs to meet your goals? Contact one of the team today on +44 207 923 6100. We’ll help you review your current portfolio and explain property investment strategies that will maximise your returns in a low-interest rate environment.
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