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Hot property is cooling

Property as has had many attractions as an asset class – low volatility, a lack of correlation to equity markets and the ability to provide a solid, reliable stream of income.
The past three years have seen another reason to invest in property – capital growth.

Returns from property normally fall somewhere between the lower figures for bonds and the higher ones from equities and on average this is around 7 per cent a year. The last three years however, have seen the average figure at somewhere closer to 20 per cent a year, outperforming all but the very best active equity investments.

The most recent figures from independent property analysts IPD show that in the in the last 12 months property has produced an enormous 21.3 per cent return, far ahead of bond performance and better than the 19.7 per cent that equi-ties returned over the period.

But this level of growth is unsustainable over the long term and investors looking to maintain this level of capital growth will be disappointed if they expect property to continue to provide such rapid gains.

Insight Investments head of external funds Philip Gadsden, says: “Markets do not do 20 per cent a year, year in year out, especially not with low inflation. We expect property to revert back to average returns of 7 or 8 per cent.”

Lucas Independent Financial Consulting managing director Mike Horseman says: “The levels of returns we have seen im the last three years, in the region of 18-20 per cent according to IPD, are unsustainable. We expect to see returns back in the region of 6 to 9 per cent.”

London and Country head of communications David Hollingsworth says the double-digit growth should not be relied upon for a fast return. He says: “With the residential market, short term is not the way to go with a buy-to-let investment. You should be looking at least to the medium term, if not the long term. To try to make a quick buck is not the best strategy.”

What are the options for property investors? Some analysts say growth is there for investors, with Europe, Asia and some sectors, such as central London offices, still offering gains.

Horseman says using a core satellite approach allows clients to invest more aggressively for growth. With 60-70 per cent of a client’s property investment in UK commercial property, the remainder can be invested more aggressively. He says: “Up to 30 per cent of investments can be put in satellite growth funds with exposure across the globe. If clients want to get exposure to growth areas, we are going to offer investments a bit further afield in markets such as Asia and Eastern Europe.”

Gadsden believes there are still short-term gains to be made in some UK sectors. He says: “Although the indus-trial sector tends to be the highest income-producing sector, the central London office market still offers some opportunities for growth.”

Gearing makes it possible to extract better returns from investments with lower returns but the possible downside does make this a high-risk approach.

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