Current geopolitical events and the effects of ultra-loose monetary policy since the global financial crisis are causing ongoing uncertainty and have left investors with a double conundrum; how do I protect (and enhance) my wealth and where do I invest safely?
Right now, bank rates and interest on European governments’ bonds, some corporate bonds and other ‘money market’ products are close to zero. Naturally, investors might prefer to keep their money in cash in the bank (or in some cases under the bed!), but in most cases you will pay to deposit your money. According to JP Morgan, approximately $2 trillion (£1.3 trillion) of European government bonds over more than one year’s maturity have negative yields. So, why do investors choose to invest seemingly at a loss? Presumably they assume interest rates will continue to drop.
At 90 North, we have witnessed the impact of the hunt for yield (to protect wealth) and desire by investors to diversify their wealth into ‘safe assets’. Of the 15 transactions we have advised on and executed in the past three years on behalf of international investors, 11 have been stabilised income-producing transactions in the UK, Europe and US.
Typically these have been modern, well-let assets with strong global brand names (Siemens, L’Oréal, Continental, FBI, VW etc) paying the rent and yielding a geared net quarterly cash coupon to investors of between 7.5% to 9% per year, which is substantially in excess of typical deposit or other money market products. These returns have proven to be highly attractive, even allowing for an appropriate risk-free premium over government bonds having a similar duration and that is before capital returns are taken into account, having held the asset for three to five years.
Notwithstanding its illiquidity, real estate remains very attractive to global investors, compared with other forms of investment. This is particularly the case for investors who prefer Sharia-compliant opportunities, whose investment options are more limited.
Interestingly, the hunt for yield is also causing a change in behaviour among investors who may typically have wanted to trade property investments on a more regular basis. Why sell an asset if it would be difficult to replace it with another with a similar current yield and risk profile? So refinancing (in an era of very cheap credit) and holding high-quality assets is preferable to many investors.
Of course, the UK remains a focus for many investors wanting yield and to protect their wealth for reasons most in the property industry are aware of. For those wanting safety (but being less sensitive to current yield), London real estate remains very popular and this accounts for the other four transactions we have executed - residential developments (whether new-build in Canary Wharf or conversions in central London) that offer the prospect of net capital gains of 15%-plus per year.
The lack of trust in many investment managers following the financial crisis also brought into focus other critical factors that combine with the hunt for yield and wealth protection - trust, transparency, and shared risk and returns with the asset manager. Long after any return to global fiscal and monetary normality, we think the essential features of responsible investing and a transparent partnership between investor and manager will endure.
Nick Judd is founder and head of investment at 90 North Real Estate Partners