By Tim Watts,
So why do institutions consistently invest in all other asset classes!
I think it’s fair to say we’re living in uncertain times, something reflected by the lack of stability and confidence in many of our investments. So it is staggering, to say the least, that the residential sector continues to be ignored by most institutional investors. It is over ten years ago that some of the great and the good prepared the foundations of the Residential IPD index. It has recently reported its ninth set of figures and, compared to the total return of commercial property, wins hands down. No matter which way you look it, however you twist the figures and whatever time frame is taken, the deeper you look the stronger the argument for investing in residential.
Residential outperforms other asset classes
At our student event a couple of months ago, guest speaker Rob Weaver clearly showed how residential not only outperforms all commercial sectors, but actually has a lower risk profile too. This is particularly apparent when considering the volatility of returns against equities.
Lower volatility (risk) with Residential
To highlight this superior performance, let’s take a hypothetical £100,000 investment made in 2000 – the start of residential IPD figures. As of December 2009, that investment would have been worth £235,000. The same sum invested in city offices would have only amounted to £125,000.
Of course, focusing on a specific time frame doesn’t necessarily provide us with an accurate picture overall. Yet fans of residential can point to higher returns over virtually any period. Go back as far as 1960 and residential IPD shows a house price growth of 274% in real terms. For commercial property, that figure is -55%. That’s right. A difference of 329%! Just think how your pension fund would be looking if it had invested in UK residential over the past 35 years!
Residential Property vs Commercial Property
This is why Inspired is committed to funds linked to UK residential performance. And that’s before we even take into account that growth in house prices, whilst a key driver of total returns, is not the sole factor. Income stream also plays a significant role throughout the life of the investment and adds to the attraction.
It’s not for me to expound the reasons why institutions have chosen to ignore residential. Those that argue they have not been able to should look at those that have made a clear commitment to the sector – most notably The Welcome Trust. Trust me, I’ve heard the excuses and that’s all they are; excuses rather than informed and rational investment decisions. For me, the question isn’t why part of a fund should be allocated to residential. Instead, it’s why commercial should form part of a fund that invests in residential.
UK residential property - long term outperformance
Most private investors and fund managers that have invested in residential will, I’m sure, quietly confirm that they were some of the best investments they ever made. That’s why it is so important to offer investors the opportunity to benefit from such resilient returns.
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I think high-end residential properties of Shanghai and Beijing prime locations also have excellent potential for capital growth. Do you have any exisiting funds set up for investing in those? I would be interested to learn more.