Stock markets around the world are currently going through a degree of turmoil and analysts and commentators are undecided on what impact this will have on the world’s major economies. Given the problems in China it is reasonable to expect more turmoil in the future. The economy there is now too large to be ignored by the rest of the world and depending on which reports you read, China certainly has some problems to address. Whilst the good news for the property sector is that interest rates should remain low over the medium term, we realise many of our clients who have a major exposure to equities may face considerable volatility in the value of their portfolio. Although we are property advisers and do not provide general investment advice, we have always acknowledged that investing in equities is a sound strategy and our position on this is not going to change. In times like this though, peace of mind may be difficult to achieve and sound investment advice and cool heads will be needed.
We keep mentioning a secure, attractive rental income stream as we are firm believers of its merits. Of course, we are also advocates of capital growth opportunities. Each client has their own needs and it is all about creating the right balance within each individual portfolio. As many readers of our property bulletins will know, we have been operating for over twenty years and our clients who bought properties, particularly in London, in the 1990s and later have benefitted enormously from rising prices. They will continue to enjoy sound returns over the medium to long term, even if values ebb and flow according to market conditions. However, the UK has now introduced capital gains tax for overseas investors and many investors are now turning to income producing properties to support their long term capital growth investments. They realise that a balanced portfolio is becoming increasingly important and a healthy cash flow helps them sleep at night.
It is universally agreed that there is a shortage of properties in the UK and nowhere near enough houses are being built to meet demand. In residential areas throughout the country there is strong rental demand as, good times and bad, people always need somewhere to live. With interest rates low, house prices are continuing to rise making them unaffordable for many people. The UK is developing a generation of tenants – people who simply can’t afford the deposit or don’t want to burden themselves with a huge mortgage. The supply of tenants is growing every year and there is no likelihood of this falling. This means a well located, low maintenance property that is well managed is like having money in the bank, except the income is better then the interest rate the bank pays! And of course, rents and property values typically go up in line with inflation or better so the real value of the income is maintained over the long term.
Some investors will say that they don’t need extra income so a strategy of capital growth with a nominal income stream is ideal. For many investors this approach works, especially for those who are not concerned when markets fall and are prepared to take a long term view. However, some of us like the security of seeing money go into our bank account every month. It is a very reassuring feeling and a real net return of 6% plus p.a.certainly protects the downside.
A steady increase in the value of the portfolio is called peace of mind. In turbulent times, it certainly has its appeal.