Why We Must Look at Real Estate as Part of Our Portfolios

One lesson learnt from this unprecedented market turmoil, is that diversified portfolios experience less volatility, than those invested in one asset class. From January to March 2020, portfolios containing allocations of 80% equities and 20% bonds dropped in value by an average 22%. Those with 50% in real estate, 40% in equities and 10%, saw average drops of just 10%. The comparison is indisputable. 

 Traditional safe haven assets like gold and Bitcoin have reacted disappointingly to the downturn caused by Covid-19. Gold dropped over 6% and Bitcoin fell from over USD8000 to under USD5000 by March 2020.  

 The only unaffected asset so far, at least in the developed world, is real estate, where short-term price crashes are rare, and long-term growth is a near certainty. From 2000 to 2020, the average house prices in US almost doubled, from USD170,000 to USD330,000, despite the crash of 2009. UK prices moved from ￡130,000 to ￡220,000 in the same period, even through the recession and Brexit. Urbanisation, gentrification, rejuvenation and infrastructure developments all nurture a steady price appreciation of certain regions in UK, particularly in the Midlands and northern England.  

 What makes these markets so investible? It is a healthy recipe of some key ingredients: 

• (Old, established) Regulation: Regulation that has evolved over centuries ensures that there is robust protection for homeowners’ investments, with strict rules governing build quality and delivery timespans. A healthy, competitive environment for developers helps lock out corruption; all of these factors preserve prices.  
• Economy and Politics – Stability of economy and politics creates more fertile ground for confidence in property ownership.  
• Inflation protector – Growth in developed markets usually tracks average inflation rates, starting at 2.5-3%. Therefore, minimum appreciation reflects earnings and living costs.  
• Interest rates –With US and UK slashing interest rates to near 0%, the cost of borrowing has never been more attractive, and mortgage deals are aplenty.  
• Consumer demand –The current decentralisation from London towards the north has created attractive buying opportunities in once neglected areas. In US, areas outside of cities that are likely to see urbanisation present a solid investment proposition. 
• Illiquidity – Sudden property sell-offs simply don’t exist due to the costs and time required. Selling property assets is usually the investor’s last resort.  
• Currency – With the UK Sterling at its weakest since 1985, investors paying with USD or USD-pegged currencies can enjoy a rare, sizeable discount.  

 A sound real estate investment focuses on income and growth potential, where the provider has a transparent track record. A couple of very popular examples include: 

Walton: A 40-year old US-based company offering pre-development land to the investor. Starting at just USD10,000 per unit, the investor can buy a plot in a project earmarked for predevelopment over a 5-9 years period, receiving a title deed on purchase. When the project sells, profits are shared with investors. Walton has so far exited 116 projects, and distributed USD1.5 billion to global investors.  

Holborn Properties: Holborn has seen a booming demand from MENA for UK and European properties. Offering an end-to-end service from mortgage, legal formalities to lettings management and resale – the buyer can take ownership without having to travel to UK. One of their partners Seven Capital, facilitates enormous volume of sales from their regional offices in Dubai, South Africa, Hong Kong and Singapore to an expanding portfolio, currently valued at ￡2 billion. With average capital appreciation of 20% and steady rental yields of 5-8%, the appeal is undeniable. 

As with most investments, there will be taxes and fees. However, if the above recipe is followed, there is ample choice of options, and the returns far outweigh the costs. Additionally, if a good mortgage is accessible, then the leveraging power of real estate as a stable appreciating asset, can seriously ramp up the value of individual wealth like no other asset.