Property has always been an attraction for speculators and investors alike. For most, the property called ‘home’ will be their largest investment. For others with an excess of disposable capital, the lure of owning more property will be strong. Whether for investment or speculation (strikingly different), it is important to be clear as to your motives and goals – before you buy.
Property as an asset class has two main flaws. First, it is illiquid. If you suddenly need to raise cash you’ll generally have to sell the entire property, perhaps when everyone else wants to sell theirs. Second, prices are cyclical. They rise over a number of years to a peak, then decline to a trough, to rise again. Available data varies: over the past 200 years, the US average cycle for residential property (apartments, houses) and commercial property (office space, warehousing, shopping malls) lasted 18 years. Other authorities point to cycles from four to 12 years.
Property cycles are driven by supply and demand. Supply is affected primarily by access to capital, borrowing costs, poor construction weather and government regulation. Demand is affected principally by demographics, wage growth, access to capital and borrowing costs. Precise timing of any market cycle is simply impossible.
Before allocating capital to property, it may be worth securing the maximisation of your tax allowances with your other capital investments, pay off high interest debt and, if you have children, make adequate provision for them through liquid savings accounts, for unforeseen circumstances.
On average, property owned over the long term acts as a hedge against inflation. Replacement costs rise over time. Maintaining property is expensive and unless you have an edge over the competition, and are better than all the other speculators in determining market timing and price while having deep pockets as you wait, the speculative lure is likely to prove a disappointment. If investing for the long term, for a steady yield and capital appreciation, it is important to consider the costs involved. The only part of any investment we can control is the cost; the rest is at best an educated guess and at worst a speculative punt.
Property should form part of a long term investor’s portfolio. There are many ways to invest. Property funds and private partnerships are expensive, designed to make money for the provider not the investor. Owning an Index of Real Estate Investments Trust (REITs) provides liquidity and diversification that owning bricks and mortar does not, but is unlikely to stimulate dinner table conversation! Most sensible investors hold a portfolio of readily marketable securities to provide liquidity in times of crisis, to complement illiquid investments like property and collectables. The property market, like all others, can stay irrational longer than we can stay solvent.
Jeremy Blatch TEP
This article was also published in the online and print editions of the Sur in English