Why property is such a well performing asset class.
When you have some funds to invest there are lots of different options that are available; stocks, shares, unit trusts, bonds, EIC’s, VCT’s and so on. However, most of these types of investments tend to be quite complicated to understand, especially without a grasp of forward ratios, price-to-earnings ratios, balance sheets etc., but property investment is much easier to get your head around.
Here are four other reasons why property is often viewed as a better investment:
1. Gearing accelerates returns
When you’re investing in property you benefit from something called ‘gearing’. You can take a mortgage on a property and borrow money at very cheap rates (currently between approximately 2-3%). For example, if you want to invest in stocks and you have £50,000, and the market rises by 10%, you’ll make £5,000. Alternatively, if you were to invest that £50,000 in property and use it as a deposit and borrow £150,000 to buy a £200,000 property, when that property rises by 10% you’ll make £20,000.
2. Rental income pays better dividends
When comparing the income you get on stocks, government bonds, cash bank accounts and property, property provides a significantly better income. With property investment, it is very achievable to make around 5% to 7% gross rental yield , which is 3x the dividend yield on UK stocks.
There are many costs to factor in but with leverage you are still able to own a much bigger property with a mortgage compared to paying cash, because the capital growth is on the total value of the property so overall the returns you make on your deposit are significantly stronger.
3. Strong capital appreciation
People always need somewhere to live and therefore property is always in demand. There’s an undersupply of homes all around the world, but particularly in the UK market and when supply is limited and demand is strong, prices will typically rise. Even when there is a downturn in the market (as it did after the Global Financial Crisis) the property market recovers quickly when you buy in areas with solid fundamentals and comparatively to the stock market, property investment has provided significantly stronger capital gains.
4. Landlords have more control
Purchasing property provides more control for investors. When investing in the stock market for example; your investment is usually in someone else’s hands i.e. the management and employees of the company invested in, as well as the funds manager if investing in a fund. However as an individual when purchasing property, you have more control over your property and you can also invest in your property to improve it as an asset.
Even if you hand the property management side of things over to a company that’s better equipped than yourself to do the job, you are still the one in control of how well the investment performs.
The property market is generally preferred by most in terms of investment compared to stocks and shares, due to the stability of property prices and being a tangible asset. Get in touch with our client advisors if you are weighing up the decision between the different investment options!