Alternative Investment: Property (1 of 8)
Property is the best known alternative investment widely used as a diversifier in traditional portfolios and is, perhaps, now more mainstream than ‘alternative’.
'Property' is Risk Level 1 of 8 in Alternative Investments.
Many investors are familiar with the idea of property as an investment as they have purchased their own homes. The property market also receives a lot of media coverage in the UK, making it the most mainstream ‘alternative’.
Details of the residential buy-to-let markets and commercial property are well documented. This report is focused on more alternative property investments such as care homes, hotel rooms, student accommodation, self-storage units and car parks.
Property allows investors to spread risk in a balanced portfolio over the long-term - mainly because the returns from property have a low correlation with those from equities, bonds and other commonly held assets over long periods.
Stability Of Income
Income from property takes the form of rental yields paid by tenants. Property yields over the last 30 years have been consistently higher than most fixed interest securities and the dividend yield available on equities. Meanwhile, the relatively long-term nature of rental contracts can provide a stable income.
Property has provided excellent returns over the medium and long-term, outperforming the stock market and delivering returns similar to bonds over the 10-year period to end of January 2012.
Property has typically provided returns above the rate of inflation. This is important as it means it can protect investment capital from the erosive effects of rising prices.
Not all property markets and property assets are equal and locations, sectors and individual propositions need to be carefully considered. The heady days of get-rich-quick stories before the 2008 property and stock market crashes are now well in the past.
The number of products in this sector has been growing steadily without the sudden spike in interest that many other alternative products experienced following the 2008 stock market crash – largely due to the subprime element of the financial meltdown. There are a range of investment horizons with exits built in at different points, offering products with proposed time-frames over 3, 5, 7 and 9 years. Some projects are openended.
The vast majority of products depend upon the sale of the property as part of the investor’s exit strategy and this adds a more speculative element to the investment. There are notable exceptions that offer buy-back options. The exact nature of the buy-backs need to be individually investigated.
Annual returns typically range between 8 and 20%, with most around the 10 to 12% mark. Most products tend to forecast higher returns in the later years when higher occupancy levels and rental rates are expected.
Investments in hotel rooms tend to offer a “guaranteed” yield for the early years, even though it may be hard to get high levels of occupancy in the period while a property establishes itself. Many hotel investments are ‘off-plan’ and hold out the prospects of much higher returns for investors who are prepared to take on the risk of the property not being completed at all, on time, or to the proposed standards. Although these are available as investment properties, a lot of the marketing literature centres on the lifestyle elements and buy-backs are increasingly being offered to appeal to SIPP investors, despite an unproven secondary market. Hotel investments, particularly in glamorous locations, remain popular and are widely available – the majority play on the continued growth of international tourism.
There are a number of opportunities to invest in student accommodation. The rooms tend to be small enough to have low entry levels and appeal to a wide range of investors. They are typically UK based and give people a high level of familiarity with the purchasing process. The growth in UK student numbers in recent years is well documented. However, in most cases HMRC defines student accommodation as residential so generally these investments are not permissible within a SIPP.
Self-storage is a relatively new commercial property sector in the UK and growing fast as awareness and demand for facilities increases. The UK has only 0.5 sq./ft. of self-storage per person compared with 7sq/ft. in the US, so the market appears to have potential. Investments in this sector offer a relatively low cost and low maintenance way of gaining access to commercial property.
There is a growing demand for care homes in the UK due to the demographics of an ageing population. Investment in this sector is similar to hotel room investments. Investors purchase a room - perhaps off-plan - to fund the development and then hand the running of the site over to an operator who will secure tenants and look after day-today management. One note of caution – the care of the elderly is a sensitive topic and a specialised task. There is potential for reputational damage if things go wrong.
Car Parking spaces are another niche sector classified as property. The model is similar to hotel room investments – investors purchase one or more spaces and hand them over to an operating company who will manage them and achieve a yield for the investor. Often the first few years’ yield is guaranteed in some way. These are not NCP style car parks, but part of or next to commercial properties, with the intention of attracting secure long-term tenants who work nearby. Exit is usually by selling the space on the open market – a secondary market in its infancy.
Minimum investment levels vary hugely in the sector and leverage is a common tool with properties. What the investor’s money is being used for can be hard to establish without clear and transparent independent valuations. Transaction costs are high and legal fees, commissions and taxes also need to be taken into consideration.
Investors and agents are understandably keen on property as an investment, despite the falls since the peaks of 2007. For many retail investors property represents an asset class they feel more familiar and comfortable with than other more ‘alternative’ investments.
- Proven market
- Could be classed as a mainstream asset
- Large choice for investors
- Buying off-plan can have associated risks
- Returns rely on factors outside investors control
There are a number of commercial and residential product types within this sector that investors can choose from. They need to take a view of the macro-economic case for investing before engaging in the due diligence legwork of obtaining valuations, examining the business model and anticipated occupancy levels – the same attention to detail is required whether looking at car parks or hotel rooms. Off-plan purchases are usually more risky as investors must take a view on the developer’s ability to finish the project on time and to standard, but they typically offer higher returns as compensation.
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