It is fair to say that the outlook for property in the Western developed world is not what it once was. Economic uncertainty, static incomes and tighter lending from the banking sector hardly provide an ideal environment for property prices. However, property investment has always been a popular choice with expats, its beauty being that you can see it, you can touch it and, for most of us, it’s ingrained in our national identity.
But the question is, how do you hold property in your portfolio if you do not believe that the traditional buy-to-lets are going to provide the returns of yesteryear and you don’t fancy the time and cost restraints that come with dealing with an asset perhaps thousands of miles away?
Martin Ellis, housing economist for Halifax, a UK bank, predicts minimal change in UK house prices this year against an economic backdrop of marginal growth and various global economic risks. So why would you add property to your portfolio at all?
Well, there are certain sectors within the property asset class that are providing solid and low-volatility returns. Indeed student accommodation is becoming one of the more popular ways to invest in property.
Why this asset class?
We all understand the effects of supply and demand on prices. If you have over-demand and under-supply then prices rise. Think of it like diamonds: The price is kept high as the supply is carefully controlled. Since 2007, 155,000 students in the UK have been forced to move into private rented accommodation due to there being no student accommodation available. This could be why investment in student accommodation by private investors rose over 100% to QR4.5 billion (£800 million) in the first half of 2012.
So while traditional property prices have been left wanting, student accommodation has been bucking the trend.
As well as proving resilient to recession, it also safeguards against inflation risk. The rental income, which provides a lot of the return, is particularly inelastic. It is a necessity for students to live somewhere and, with the Bank of Mum and Dad providing the majority of funds, along with the natural rise in rents each year, the inflation protection is particularly evident.
The Mansion House Student Accommodation Fund is one fund that invests in student accommodation within close proximity to the UK’s red-brick universities and provides investors with an asset class not correlated to traditional markets.
Investing in property through a fund will, in most instances, provide a higher level of diversification than investing directly. Let’s say you wish to invest directly in student accommodation, as you believe it is an asset class that is and will continue to be in high demand by renters. Which university city do you choose? What happens if you pick the wrong city? A nasty example would be Belfast in Northern Ireland, where property prices have plummeted 50% since 2007. How do you ensure that this doesn’t happen to you? By choosing a fund, your invested money will be diversified through a number of different locations, thus spreading your risk. An example of the diversification of the Mansion House Student Accommodation Fund can be seen above.
What are the risks?
In the past there have been instances where property funds have experienced periods of illiquidity. If a large number of investors want access to their funds all at once it may not be possible. Property is not an asset that can be immediately realised to cash at short notice. If traditional stocks are like turning a jet ski, holding property can sometimes be like trying to U-turn an oil tanker. It is something that all investors in the property asset class, whether it be a direct investment or through a fund, should bear in mind.
Who is this type of investment likely to appeal to?
A property fund is appropriate to any investor with a mid- to long-term investment horizon looking for the uncorrelated performance of property against traditional stock market investments but not wanting the administrative headache of physically owning the asset.
A fund such as this will usually be a small element of any portfolio. Investors should be aware that access to these funds is on a monthly basis and it would always be suggested that a five-year outlook is prudent.
Before making any investment decisions please consult your regulated financial consultant. Content/Photo Source: Qatar Today