The Forgiven Asset Class

According to the Savills World Research team, between November 2020 and November 2021, investment in global real estate increased by 38%, to $1.3 trillion. In addition to this staggering figure, there was a rise in the number of investment funds targeting property, largely due to investors diversifying their portfolios. In fact, 1,250 property funds focused on $365 billion, according to Preqin’s data.?

Although the office real estate sector is still below the pre-pandemic levels and a huge rise (54%) in industrial real estate, residential property is leading the property investment charge for the first time, becoming the largest sector for global investment in 2021. But why are investors and people so obsessed with property?

Why is property considered a good investment?

For many years, property has been considered an excellent long-term investment; property prices tend to increase over a long period of time which means that it’s a reasonably safe bet that you can make money on the investment. The buy-to-let market has brought real estate investment to the fore over the past few years.?

Consistent, record-breaking low-interest rates have meant that the opportunity to purchase a second property and build a real estate portfolio has been open to a much wider group of people. Attracted by the potential level of income that can be gained from renting out a property, either long or short-term, as well as ongoing demand and resiliency to buck the global economic trends, this asset class continues to defy its critics.?

This is despite inflation topping 9% - the highest level in 40 years – and increasing interest rates, the rise in energy prices and the cost of living crisis, rental growth and ongoing demand pushing the desire to invest in property even further. Morgan Stanley recently reported that the growth of real estate goes far beyond analysts’ expectations, with returns predicted to be at their highest since 2010 in the US and the UK. Even though recovery from the pandemic has been slower in Europe and Asia, real estate investment still stands strong.?

Should it stay, or should it go?

Property also seems to buck the investment trend that if it’s losing value, get rid of it. With most other asset classes, if it’s making a loss, it’s time to sell. If we think about stocks and bonds, NFTs and cryptocurrencies, and even more tangible assets, like art or vehicles, investors are shrewd. If they need to diversify their portfolio or spread risk, they’ll sell all other asset classes before they consider moving on real estate.

One of the reasons is that property is probably the best long-term asset investment there is, worldwide. Even if the property is making a loss, i.e. during a recession when real estate tends to dip into a negative equity situation, people hold on to it. The tangibility of the asset and ever-present optimism that the property market will always bounce back, meaning prices rise again, puts aside the ‘panic sell’ notion. Yet with other asset classes, as soon as there is any solid uncertainty around that asset class – just look at the energy market at the moment where a large number of investors are disposing of their investment in traditional energy resources (oil, gas) and diverting it into renewable sources (solar, wind) – investors have little hesitation in reviewing and adjusting their investment portfolio.?

An obsession with real estate

There seems to be an underlying emotional attachment that people have with bricks-and-mortar, which consistently puts their faith in this asset as an investment. In fact, new research backs this up when it found that 43% of people surveyed said ‘they felt a sense of loss, sadness or grief’ when they moved house. Almost twice that many people (83%) admitted they were ‘emotionally attached to their home’, with 62% saying they felt nervousness or a sense of dread just by the thought of selling up. Even if the property was at a lower value than when they bought it, people would go to great lengths to hold on to it by either living in it, taking in lodgers or renting it out.

But although real estate investment is increasing worldwide, investing in property is still considered a ‘British thing’. Finder.com’s Retail Investor Sentiment Report revealed that it’s the Brits that are most likely to invest in real estate compared to 25 other countries. Asked what would be the best performing investment in 2022, 30% of Brits said it would be property, well above the global average (23%).

The property market in 2022

Throughout the Covid-19 pandemic and into 2022, the property market has continued to defy analysts’ expectations. Even though inflation and interest rates are rising, the cost of living is increasing, and energy prices are going through the roof, it doesn’t seem to be putting people off investing in property. This is predominantly led by a lack of property for sale compared to demand, a continuing surge in rental growth as 18-34-year-olds find it harder and harder to get on the property ladder, and the ever-present belief that whilst property prices may drop towards the end of 2022 and into 2023, long-term they will increase again.?

There are good reasons for incorporating property into an investment portfolio:

• A good return on investment – the return on investment for rental properties was 7.7% in 2020, compared to just 4.8% in stocks and bonds. Where other asset classes are affected by global economies and outside forces, the property market seems to be immune.
• Opportunity to build equity – by buying and renting out a property, you have the opportunity to build an investment portfolio that not only earns a regular income but also increases in equity value.
• Bends inflation rules – contrary to what happens with other assets, rising inflation can potentially benefit property investors. A rise in inflation can often be passed on as an increase in the monthly rental, and if there is a fixed-rate mortgage on the property, investors stand to gain.

Investing in property as an asset class has always been a favourite with many investors. With the increasing volatility in current global economic and financial conditions due to worldwide forces, property seems to be cementing itself as one of the best, albeit forgiven, asset classes.

International Wealth Solution Ltd (IWSL) are professional experts in providing high net worth wealth solutions. If you have a client looking for estate planning and has a combination of properties across multiple countries, our team is here to help you with sound advice and comprehensive solutions. Contact us at?[email protected]?for further advice.