By Tim Watts
Tim Watts
As a new year starts, out will come forecasts on what the “experts” think will happen to residential prices this year. The question is how accurate are they? I would strongly recommend a degree of caution on making investment decisions in this sector based on these forecasts.
Let us take a look at some of the forecasts made at the beginning of last year:
- The Royal Institution of Chartered Surveyors, Simon Rubinsohn -10 to -15%
- Deutsche Bank, George Buckley -15%
- Capital Economics, Seema Shah -25%
- Lucian Cook Savills -5%
- And finally one of the most accurate that I could find was from Trevor Abrahmsohn at Glentree International at -2%.
Investing in the residential investment sector as opposed to residential development is in my view for the mid to long term investor. It would seem sensible to consider what the “experts” are saying before deciding whether to invest but is that really the case?
I remember sitting round a table as a consultant to Lloyds Banking Group just after the takeover of HBOS in January last year when the question was asked as to where I thought prices would be by the end of 2009. Yes, I hear you saying, it’s easy to forecast after the event but genuinely my view was that the range would be between -2 and +2% and that it was more likely to be in positive territory. The room fell into silence and only those that knew me well wanted to understand why I was in such an optimistic mood. Nationwide have recently reported that for 2009 the annual average house price growth was 5.9%.
House prices rising, but the forecasts said rain?
Of course there have been wide variations with some properties showing falls of as much as fifty percent. The reasons for this I shall cover in my next article on the essentials of residential investment.
It still amazes me how most institutions do not have an allocation within their pension funds for residential even though the track record of residential has consistently outperformed other property asset classes over almost any time frame. The individual investor knows only too well how residential has performed as part of a long term investment strategy. Residential is however capital intensive which is why at Inspired we shall have a strong focus on providing residential funds which enable investors with a minimum of £25,000 the opportunity to invest.
UK residential property - long term outperformance
Interestingly in the Sunday Times Money supplement this week there is an article titled “ shares beat property in profits race”. This headline took me somewhat by surprise as unfortunately I did listen to some experts who pursuaded me to invest in shares as well as residential. Whilst I think looking back too far in time as a measure for future performance is also a dangerous route to go down it stated that investing in a house since 1959 showed a rise of 273% or an average annual real return of 2.7% according to the Halifax. Shares, wait for it, have returned 1180% over the past fifty years giving an average real return of 5.2%. This I simply couldn’t believe until I read the small print. This figure included dividends without which the figure would be only 86% or 1.2% in real terms. In other words half that of residential. What this article failed to consider was the fact that residential can and normally is let and generally will provide similar initial income returns to that achieved through a dividend.
Listen - the facts speak for themselves !
So in conclusion I would suggest that the facts speak for themselves no matter what the headlines say. Don’t put off your weekend away due to the weather forecast nor take too much notice of residential forecasts if you are investing for the long term. Residential has continally outperformed all other property asset classes and should definitely form at least part of a balanced investment strategy. Have you been reading this to see what my forecast is for this year? It will be announced and discussed at the next Inspired event set for the 11th February, see our event site for further details.
