Why Diversification is Key to Long-term Property Investment

2017-11-27


Property has always been a popular long-term investment[1]. In the case of buy to let, there is the monthly profit on rental while landlords may also look forward to reaping the benefits of potential capital appreciation in the long-term. For off-plan investors there may have been profit potential in flipping (i.e. selling on) an apartment at the stage of completion and a means of reaping financial rewards without the complications and time-drain rental property management.


Today, however, with the recent tax relief cuts to landlords and the introduction in April 2016 of additional stamp duty[2] on second homes, the profit potential has not been quite as attractive for the average buy-to-let landlord as it was previously. That is why it makes sense for property investors, who still want buy-to-let investments to make up part of their portfolio to invest elsewhere in the property market as well i.e. to diversify.


This means building a property portfolio which includes both buy-to-let and other investment types e.g. construction projects, as well as perhaps a commercial property investment. This way, if one sector of the market slows down, as buy-to-let has[3], then profits from other sectors may make up for the shortfall. Certainly, an off-plan construction project where apartments are sold on completion means landlord tax relief cuts could be less of an issue, while there is no stamp duty on second commercial properties or mixed use (i.e. a combination of residential and commercial)[4]. However, the addition of other asset classes such as bonds and shares should not be ruled out either and could fit in nicely together with a property management portfolio.



Why diversification is particularly important right now


Having a diversified property investment portfolio very much matters, particularly at this moment in time with the UK government negotiating the departure from the EU. Most economists are pessimistic about the aftermath of Brexit[5], making for volatility in the markets where certain investment sectors may be particularly affected – not to mention individual companies. At the same time, others may benefit. Shares tend to do well in certain economic situations, for instance, since inflation increases their value[6].


Other potential hazards on the horizon which may affect the UK economy include potential US protectionist policies[7]. Uncertainty, it seems, is becoming a bit of a buzzword in the business world, so it is no surprise that many investors are seeking perceived safer investments right now[8]. Property could possibly offer this thanks to the fact it has a low correlation to bonds, stocks and commodities. In addition, if the economic situation does worsen then stocks and bonds may be hit sooner than property since it may take longer for the ripples to reach the residential property sector (commercial property is hit sooner if there is not a great demand for office or factory space)[9].



Diversification is not restricted to property ‘types'


Geographical diversification is just as important as different types of property investment such as buy-to-let and buy-to-sell – and nowhere more so than in the property market. Anyone with interest in the market knows that the north of the country is outperforming most areas of the south at this moment in time and that London can sometimes seem like a separate country when it comes to property prices. According to Totally Money, the highest-yielding areas are Nottingham, Plymouth, Dudley, Liverpool, Cleveland and Preston[10]. However, even just looking at particular zones in Inner London there is a sizeable variation of up to £75,000 between different boroughs for similar properties in the same zone.


In general, we know not to put all our eggs into one basket, and the same goes for investing. Opportunity is too limited and risk too high when dealing with one market. Investors need to learn to be flexible by diversifying their portfolios. Having several non-correlating asset classes gives you choice, and the more you divide, the more you can conquer.


As with any investment, as well as potential benefits, there can be risks too. Make sure you fully understand your investment before entering an agreement and seek financial advice if needed.

Sources:

  1. Citywire / Property Investment For Retirees

  2. This Is Money / Budget Confirms Extra Stamp Duty

  3. Financial Times

  4. Telegraph / Investors Turn To Semi Commercial Property To Cut Stamp Duty

  5. Financial Times

  6. Moneywise / How Stocks And Shares Can Help You Beat Inflation

  7. The Market Mogul / Protectionism America Overview

  8. Independent / Gold Two Year High Silver Investors Safe Havens Brexit

  9. Fortune / Why The Commercial Real Estate Crash Never Came

  10. Totally Money / Buy To Let Yield Map

  11. House Price Index June 2017


Your capital is at risk if you invest in property. This includes illiquidity (the inability to sell assets quickly or without substantial loss in value), and the loss of invested capital if the wider property market or an individual property suffers a reduction in value. Investments on Homegrown are not covered by the Financial Services Compensation Scheme. Past performance and forecasts are not indicative of future performance. For more information see our full risk warning. Homegrown Group Limited is authorised and regulated by the Financial Conduct Authority (FRN: 694952). Investments through Homegrown are equity investments.
Future performance is not guaranteed and is based on projections only. Your capital is at risk if you invest in property. For more information see our full risk warning.