Property as an asset class

Mark is a renowned property expert, public speaker and founder of a website with an embarassingly similar name, YourPropertyExpert.com. I thoroughly recommend you signup for Mark's excellent free newsletter at his website. This article first appeared in his newsletter in July 2004 which Mark has kindly contributed to this site - Ranjan Bhattacharya

As an asset class, property has some structural advantages over other assets.

The alternative asset market notwithstanding, I believe that, for most investors, the only two asset classes that are real alternatives are bonds and stocks. (For the record, I own two classic British sports cars, one of which is currently probably worth 20% more than I paid for it, but I don't delude myself that these are assets - they are simply good toys - and I certainly can't bring myself to sell them.)

Over the few months, I've been facing some tough decisions about my own portfolio, and the conclusion that I've come to is that property is a good long-term asset, but much of the market may well be overpriced at the moment.

The fact that the market is currently overpriced, however, does NOT mean that I'm not buying. It does mean, though, that it takes a lot longer to find the right investments than it did a couple of years ago, since a far higher proportion of properties do not meet my investment criteria.

One of the historical reasons that property has been cited as good for investors is that of leverage - namely that a bank would lend 5 to 6 times as much as the investor had to put up, provided it was secured against both property and income. I do not believe that this is a compelling class advantage, simply because the derivatives markets have evolved from simply risk-hedging options into complex investment types, where the net effect is that an investor's initial investment can be leveraged, in fact to rather high multiples than an 85% LTV mortgage.

So, why do I think that, structurally, property is a good asset class?

1: Innefficiency of the market.

For any given bond or stock, there is a centralised market. Any broker is typically able to execute a transaction on behalf of an investor at a market price which is visible to other investors both before and after the trade. (The exceptions of ultra-small cap stocks where the market is too small to have regular trades, and arbitage opportunities where a single stock is traded on fractionally different prices on different markets are so complex/risky that they are unlikely to be an investment option for most people considering buy to let.)

In the case of property, however, there is no centralised market available to match all purchasers to all vendors. Instead individual properties are marketed through multiple channels (vendor newpaper ads, the internet, different estate agents, either on sole- or multiple- agency deals.) This, in conjunction with the non-price-disclosure legislation makes it very difficult for either a potential purchaser or vendor to determine accurate comparators to with accuracy of more than 5-10 percent.

Likewise, the willingness of a vendor to accept an offer on a marketed property is very much more complex than a vendor who executes a sell order on a stock. The vendor may take into account personal circumstances, and even subjective prejudices, in determining what bid to accept. For the inexperienced purchaser, or the purchaser emotionally committed to a particular property, this has major downsides. To the experienced property investor, able to detach his/her feelings from the deal, and willing to walk away from any deal what doesn't meet their criteria, this gives a window of opportunity.

2: Similarity of prices within a sector.

Despite what I said in point one, there are some overall similarities within a sector (geographical region / house size.) For example, a two bedroom house on the Maidenbower estate in Crawley will currently sell for between £160k-£180 depending on vendor circumstances, purchaser circumstances, micro-location, and facilities (whether it has an en-suite bathroom and/or a garage.) So a purchaser who bought such a property in 2001 for £135k can currently consider a safe profit of at least £25k before taxes and transaction costs.

By comparison, a purchaser who bought £135k of stocks within a market sector, say Retail, in October 2001, could have seen a variety of outcomes. For example, someone who bought Woolworths Group at 30p in October 2001 will be pleased to see it at 46p today - a nice 50% gain. Wheras someone who bought bought Dixons Group at the same time will have paid 175p, but now only see the shares trading at 144p - an 18% fall.

This tracking of house prices means that the pricing is relatively more predictable on a macro-economic level than those of an individual stock. Of course, the stock-market enthusiasts will counter that the same £135k invested in property could have bought an index tracker, however long-term options buying over a market index has not proved a repeatably succesful strategy.

3: Potential for improvement.

Once an investor has bought stock in a company, there is little the investor can do to increase the value of those shares. It is doubtful that even the richest investors could buy enough of a FTSE-100 company's product to materially influence its share price. Indeed, at that level, insider information legislation makes it very hard to influence the share price legally, even if one had the means.

By comparison, there typically are alternatives open to property investor. Something as simple as a couple of days and a hundred pounds spent on paint can lift a house, and, even if not affecting its resale value, make it much easier to let. Replacing carpet with wood, or laminate with carpet, or simply fitting brighter halogen bulbs for viewings can likewise make a property more appealing for relatively little outlay. Not only is this cheap, it is legal.

4: Cash yields.

Many of today's mature stock-market investors were brought up with markets where dividend yields were higher than bond yields. This has not been the case widely (if at all) in the market for many years. By comparison, BTL property can generate better cash yields than most common stocks, and equally better than investment-grade bonds.

5: Government planning policy.

Population is increasing faster than the number of houses, over a long term. Planning policy in the UK (unlike that in much of continental Europe) is weighted in favour of doing nothing. For the same reasons that Charles de Gaulle airport will become larger than Heathrow in passenger numbers within the next 5 years, it is most unlikely that more houses will be built than people coming into certain regions. This is, of course, due to an artificially limited supply of housing stock, through the planning process, but this is an artificial limitation that all parties have committed to retaining.

CAVEAT EMPTOR - simply because an asset class contains some advantages (assuming you agree with some of what I've written), does NOT mean that every deal you will be offered is sensible. There are many pitfalls in property investing, not least sifting the genuinely good deal from that which the salesman sincerely believes is good, but doesn't prove to be bad until a year later (think off plan investments where large numbers of properties have been released at the same time, forcing market rents much lower than they were at the time everyone did their dilligence.)

Ok Ranjan, I want to know more about your Proven Property Investment System.

• Tell me more about the Build Your Property Empire Home Study Course
• Tell me more about your one day seminars
• Tell me more about your 1 year property investors mentorship programme

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