At 6.5%, property yields are the same today as ten years ago but long-term gilt yields are down from 4.5%, index-linked gilt yields are -0.5% against +1.5% and inflation is 1.5% against 3.5%.
This is my last column for Property Week. It’s been great fun, but a ten-year lease is enough for this tenant. (Do ask me back in 10 years’ time if my tips turn out OK!) At 6.5%, property yields the same today as ten years ago but long-term gilt yields are down from 4.5% to 2.5%, index-linked gilt yields are -0.5% against +1.5% and inflation is 1.5% against 3.5%. So property now has a two-point-thicker yield cushion over bonds and yields five points over inflation, not three. Great investment value by any standards! Here’s how I see the next few years in property and my tips to make the most of them:
1. Central London house prices will fall further and faster.
2. Commercial property prices over most of the country will go on rising. Today’s juicy margins over gilt yields discount a property disaster, while rents and tenant demand are improving steadily — that can’t be right. But Central London offices show all the classic signs of a speculative bubble.
3. Long term interest rates will double at least. Lending money to the British government at 2.5% fixed was the road to ruin for investors in the 20th century, as it will be for most of the 21st. Index-linked gilts are also a screaming sell at their current negative real yields. They are guaranteed to destroy value.
Both types of gilt are only at these absurd levels because of forced buyers — the government through quantitative easing (which the Americans are already stopping) and pension funds stuck in their liability-matching straitjacket. When forced buying stops in any market and prices fall off a cliff, you never know how far it will be to the bottom.
4. Stick to property fundamentals and do your long-term homework. Don’t be seduced by easy credit or clever schemes to dodge tax and stamp duty — they take so many punters’ eyes off the ball and lock them into properties when it’s time to sell. Britain’s property market has always been highly cyclical, so you must assume it always will be. Don’t chase yields down so far that you’re dead when they shoot up again.
5. Don’t try and invest in every region and market. I’ve managed perfectly well for 33 years managing direct portfolios for big pension funds without investing in offices at all. But do keep your eyes peeled for newly emerging property markets — that’s where the super-returns are made (and sometimes then lost).
I’ve seen supermarkets, retail warehouses, care homes, student housing, banks, pubs, hotels, cinemas, gyms and now waste disposal and solar parks come — and sometimes go — as serious pension fund investments. But I’ve also seen shrewd shop investors, for example, fall by the wayside, so never forget a niche can turn into a tomb (as Arnold Weinstock of GEC, one of my first backers, used to say).
6. Find the best people you possibly can to work with — colleagues, surveyors, solicitors and managing agents and stick to them like glue. My grandfather left school at 13, started his own business in 1926 and ran it for 40 years through slump and war. “Always employ the best people,” he used to tell me. “They cost so little more than the ordinary ones.”
Good luck and good hunting!
Matthew Oakeshott is chairman of OLIM Property.