UK property - an investment for volatile times

For the first time in forty years inflation has become a major issue. As central banks struggle to bring it under control, the traditional conservative assets - cash and government bonds - have been upended, forcing investors to reassess their options. For many, property may offer a solution.

A typical diversified portfolio might contain four major asset classes - cash, bonds, equities and property. For the more adventurous, precious metals and cryptocurrencies may add a little spice.

Cash provides liquidity and, at least recently, a return in the form of interest. However, those holding cash have seen inflation drive down its real value by around 10% over the past year.

UK government bonds have long been regarded as the ultimate safe haven. They have proven to be anything but. Not only have they lost value through inflation, they have seen a collapse in capital value of around 40% in the last twelve months. Unless central banks return to ultra-low interest rates, much of this will never be recovered.

Can property offer a solution?

Property falls into one of two main types - commercial and residential. Commercial property can be accessed by retail investors through funds, REITs and the listed shares of commercial property owners. Each has their advantages and limitations, but here we focus on directly owned residential property.

Any investment will seek to protect against inflation and provide an additional return by generating income, achieving a capital gain or a combination of both. How does property fare?

Capital gain

Since 1990 the housing market has seen two periods of boom (2001-4, 2020-2) and two of bust (1990-2, 2008-9). Over that period data published by Nationwide shows - 

- The average house price has increased from £57,000 to £272,000, a rise of 470%
- House prices fell in just six of those thirty-three years
- The number of ten year periods to record a fall was nil

Income

Long term data on rental income is difficult to source but figures from Statista and Hometrack suggest that average rents in the UK have risen by 38% since the beginning of 2009.

Even in the current difficult climate rent is a non-discretionary spend and, except in extreme circumstances, remains a reliable income source.

Inflation protection

During periods of high inflation, not only do the costs of goods and services rise. So do incomes, albeit with a time lag.

There is a lond standing relationship between house prices and inflation. As incomes grow, house prices and the rents they generate increase. For some seventy years, house prices have exceeded inflation by close to 1% per annum.

UK residential property has proven to be a highly reliable investment, offering secure and stable medium to long term returns. With the UK suffering a housing shortage that will take decades to unwind - if ever - there is every reason to believe that it will continue to do so.