Is property the safest investment? Abu Dhabi private wealth manager Waqas Babar from Globaleye shares his views
My personal investment philosophy as someone with a young family and a property is when it comes to investing, making a modest return consistently while avoiding losses is more important than crossing my fingers and hoping for the best.
With the big bat approach, you may hit it out of the park once in a while, with a resulting adrenalin rush that feels great, but the consequences of ‘giving away your wicket’ may be devastating to your financial position. Tell your spouse that you lost the kids’ education fund in the stock market and you’ll be in trouble!
With signs of recovery in the economy, many of us are ready to return to the market in hopes of some kind of yield that beats the pittance that banks are paying. So what do we do? Where is the safest place to store our hard-earned cash? Stick to putting your money into what you know, i.e. good old bricks and mortar, that if anything is tangible? Do we borrow to buy our first or even next property in the hope of living off the rent as our retirement plan?
Monnery (2011) is the most recent study amongst others with a record of housing prices since the year 1900 till 2010 for six countries. The best-performing house-price indexes are Australia (2.03 percent per year) and the United Kingdom (1.33 percent). The United States (0.09 percent) is the worst. Norway (0.93 percent), the Netherlands (0.95 percent), and France (1.18 percent) fall in the middle. House price indexes are notoriously difficult to interpret, but they do appear to have kept pace with inflation over the long-term. Nevertheless we must remember that a home is a consumable good, as well as an investment, therefore the attributes of a home are a by-product of its intrinsic utility to those who live there.
Now for those of us that belong to the ‘property can never lose’ or ‘I put all my eggs in one basket by investing in property’ school of thought might look at these numbers and realise that if keeping up with inflation is the benchmark then surely the bar must be raised? Given what we all saw happen to home values and consumer spending in the recent recession years, I still recall conversations with a client of mine who was heavily invested into the property market throughout 2007 down to his last penny believing the ride wasn’t over just yet. A year later after having lost his job and seeing the value of his properties plummet, the conversations we had were very different I can assure you. Anyhow, being a young and skilled professional he began the seemingly impossible journey towards the road of recovery and today is a diversified investor but had he been, say close to retirement, then what options would he have had?
There are lots of other factors that must be taken into account here such as other geographical location of the property plus local market knowledge and the ability to find a bargain in your hometown for instance. But there are factors on the other side of the fence too, such as the cost of borrowing, property maintenance and insurance, legal fees and loss of rental income during periods of non-occupancy that we must take into account to balance the scales. So how can we hedge against the stability of our property to aim at getting returns north of inflation? Simple. Diversify, diversify, diversify!
We strive throughout our working lives to be in the best position during and at the end of it to ensure we can get consistent but safe returns for us and our loves ones. To achieve this, history would suggest we must have an open-minded but diversified approach as the question is no longer ‘is property the safest investment’ but rather ‘is it safe to only use property as an investment’?
