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Wednesday, June 05, 2013

Buy-to-let relative returns

So you think houses are cheap and a gross rental yield of 8% makes buy-to-let property a screaming buy.  Not according to Hargreaves Landsdown Mark Dampier.  Mark is their Head of Research so we are guessing figures are his thing.  Mark draws our attention in this recent Independent article to research conducted by I'm sure some very clever people at Majedie Asset Management highlighting the relative current pricing of various asset classes including residential property.  What it reveals is that UK equities are the cheapest asset class if you compare their earnings yield of 7.7% & a P/E of 13 compared to other investment opportunities including buy-to-let property on a P/E of 35.  This is significantly ahead of the earning yield they put forward for buy-to-let property of less than 3%.

Lies damn lies & statistics

Looking at the pretty graphs put forward by Mark I would make the follow brief observations:

1. Mark rightly identifies that setting up a buy-to-let is not cheap - however once it is done largely only minor costs are incurred in maintaining the property.
2. Mark is very pessimistic about capital growth in the housing market.  If you take the view that property values will never go up then there is a case that property prices are relatively expensive.
3. What Mark doesn't appreciate are the defensive qualities of property.  Yes, stick your savings in shares and as I know to my cost you can also lay out tens of thousand of pounds in an investment that will ultimately be worth nothing.  This is virtually impossible with residential property.  Bricks and mortar will always have a significant value even in the worst economic climate.
4. As Mark will know the secret to successful investment is not to loose too heavily when you do loose as well as making big gains when you do well.  Residential property makes this more attainable for most people.

My final comments about Marks interesting piece is that his article in the June edition of Hargreaves Landsdowns' Investment Times does end by suggesting that we all look at some equity based investment ideas where surprisingly HLwill all take a commission if you buy.  I caveat my view by saying I do have my SIPP with HL as well as a significant personal share portfolio so I'm not scared of investing in shares.

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1 comment:

Anonymous said...

Mark is also omitting one very important fact. A buy-to-let investment involves a mortgage, which leverages the investment.

For example, a property that cost £200K which yields an annual rental profit of £16K has a rental yield of 8%.

However, if it has been bought on an 85% LTV mortgage, the owner has only invested £30K of her own money.

Let's assume the annual mortgage payments are £7K, reducing the annual profit to £9K.

The annual return on investment is therefore actually 30%.

In my own case, the deposit for my rental properties came from an equity release on my own house (those were the days, eh?)

I have therefore bought two properties without investing any of my own money, and the return on investment is effectively infinity.

Show me a way to buy UK equities without investing any of your own money.