Mark Dampier: Why buy-to-let flats are not an open invitation to achieve high yields
Friday 10 May 2013
This week I plan to focus on the investment landscape generally, rather than looking specifically at a single investment. I was inspired to do this following a conversation with a neighbour. He suggested I should look at a new development of flats near my office in Bristol which had just come on to the market. They were selling out fast, proving to be particularly popular with buy-to-let investors.
On closer inspection it wasn't hard to see why. One-bedroom units were selling for between £160,000 and £170,000 with a yield of approximately 6 per cent gross. Rates on cash deposit are around 1.5 per cent and could fall further in my view. Against this backdrop the attraction of a 6 per cent yield is obvious.
The mere fact I was even looking at property as an investment might be enough to make those that regularly follow my views fall off their chair backwards. They will know I have been a property bear for many years. Indeed, there are many factors to consider besides the attractive headline 6 per cent yield.
First, there are the costs associated with buying the property. Next, it is likely to need furnishing, while some form of landlord insurance might also be prudent. These costs alone are likely to eat up the first year's yield at least.
It must also be remembered that secondary property can be illiquid – it could be difficult to sell quickly if you require your capital back. Buy-to-lets can also suffer from periods of vacancy between tenants where no rent is coming in. Finally, there is general maintenance and repairs. If nothing more these can be a hassle, unless you pay an agent to manage the property on your behalf, incurring further costs to eat into the yield.
I am not against buy-to-let property as an investment. I can understand canny investors buying property in out-of-favour or poorer locations and being compensated with yields closer to 8 per cent. Unless you have been in central London over the past few years, though, property has not been a great investment. The prices of older flats around the same development I looked at have pretty much gone nowhere since 2007. Once inflation is factored in that's a loss of 25 per cent in real terms.
This brings me neatly back to the more familiar subject of equity investment. I was initially attracted to a yield of almost 6 per cent on the buy-to-let property investment, yet I can buy equity income funds yielding over 4 per cent and where I am likely to enjoy dividend growth, much lower transaction costs and considerably less hassle. In addition, equity investments are generally easier to buy and sell at short notice. I do have greater short-term volatility, but that is because equities are priced continuously throughout the trading day. With property volatility is disguised by a less than instant valuation process.
Finally, for those still tempted with an investment in property, I recently came across some analysis from Majedie Asset Management highlighting just how expensive alternative asset classes are. They have done this by using the price/earnings ratio (P/E ratio) to value different asset classes. This aims to measure how cheap or expensive they are relative to one another, with a high P/E ratio suggesting an asset class is expensive and vice versa.
On this basis the UK stock market is trading on a P/E ratio of 13x for the calendar year 2013 with a yield of 3.5 per cent, with the expectation this should rise slightly over the long term. In contrast, commercial property trades on a P/E multiple of approximately 25x (after costs). Infrastructure, which has proved popular with income-seeking investors, is trading on a multiple of 22x, while residential property is on 35x. Buying into relatively expensive assets just for the sake of diversification simply does not make sense to me.
If you think property and infrastructure look expensive I have a bigger shock for you. UK and US government bonds are trading on P/E ratios of 57x, and Japanese 10-year bonds are on P/E ratios of 200x. While investment decisions shouldn't be based on one metric alone, I hope this goes some way to putting any investment decisions in perspective.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk/independent
Compare with the Independent: See how much you could save by switching credit cards. Compare now
Is it time to turn your back on Isas?
The ticking bomb of Generation Y
Lending price war erupts – this time for real
How to start your own internet business
The whole truth about legal fees: Conveyancing can knock a big hole in home-buyers' finances. To get the best deal you must cross-examine solicitors about their charges, says Sue Fieldman
- 1 The future of sex: The first female condoms were derided, mistrusted and shunned - but will their modern counterparts catch on?
- 2 South African rhino finally put down after roaming Kruger park for days with horn hacked off and bullet in brain
- 3 Italian pensioner hires an escort who turns out to be his son's girlfriend
- 4 Orgasm machine to deliver climax at the push of a button
- 5 Channel 4 announces two-hour TV show to be broadcast 'Live from Space' later this month
Apple's Tim Cook: Business isn’t just about making profit
Thousands of young people forced to go without food after benefits wrongly stopped under 'draconian' new sanctions regime
Ukraine crisis: New navy chief 'defects' and surrenders Crimean HQ as Putin claims ultranationalists forced intervention
Britain's top vet sparks controversy with call for ban on slashing animals' throats in 'ritual' slaughters for halal and kosher meat products
Ukraine crisis: Russia dismisses '3am ultimatum' as 'total nonsense'
If you're horrified by a flame-roasted dog, you should be shocked at a hog roast
iJobs Money & Business
£12000 per annum: Inspiring Interns: The company works with Tier 1 FTSE 100 Ba...
£32000 - £36000 per annum + generous benefits: Pro-Recruitment Group: * TAX * ...
£37000 - £40000 per annum + £20000 benefits package: Pro-Recruitment Group: **...
£30000 - £35000 per annum + generous benefits: Pro-Recruitment Group: Mixed Ta...
Day In a Page
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar
A newly refurbished one-bedroom flat in the heart of Mayfair, close to Grosvenor Square
A charming four-bedroom house overlooking Burleigh Square Park, close to Thorpe Bay
A three-bedroom farmhouse with a large inglenook fireplace and exposed beams
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000
A two-bedroom flat with an open plan kitchen and two balconies, close to Arsenal station
A Grade II-listed home with six bedrooms, secluded landscaped gardens and views across Hadley Green
A Grade II-listed mansion with two apartments and a cottage, near Gretna Green
A three-bedroom Grade II-listed mews house with vaulted ceilings and roof garden
A spacious Grade II-listed family home with annexe and equestrian facilities among four acres of land in Itchingfield
A four-bedroom home with exposed brick walls and open fires in the picturesque village of Northill
A Grade II-listed property with five bedrooms and unique tower, overlooking Hastings Old Town
A charming five-bedroom detached family home, set within half an acre in Kew