On 18th April 2018, the Office for National Statistics announced that UK inflation had fallen to its lowest rate in a year. It fell from 2.7% in February to 2.5% in March. On the face of it, that sounds like good news, except when you consider how the rate of inflation stacks up against the interest rates that most British savers are achieving. The cost of living is rising at 2.5% per annum, while money in the bank is typically earning far less than that. In short, most savers are effectively losing money.
This week, Moneysavingexpert.com lists three 'best buys' for easy access savings accounts, and not one of them exceeded 1.25%. When it comes to savings bonds, the best of its top picks came in at 2.3%, and that requires tying up one's cash for at least three years.
ISAs look no more attractive. According to the same organisation, the best easy access account offers just 1.3%, while savers who are prepared to lock up their money for three years on a fixed rate can earn a not-so-heady 1.87%. As Martin Lewis notes: "The top savings account interest rates have started creeping up following November's base rate rise, but many are still dismal."
Some current accounts do, admittedly, offer higher rates, but they tend to apply to only very limited amounts. Tesco, for example, offers 3% on current balance up to £3,000. Nationwide offers even more, but only on balances of up to £2,500 and only for a maximum of 12 months. For those with more to invest, the conventional savings route offers very poor returns indeed.
The case for investment:
Savers, of course, have not been blind to the woeful returns their money is making. Banks and building societies make their profits by investing their customers' money and earning better returns than the interest rates they pay out. That has always been true, but seldom have savers got such a raw deal.
Recognising that money in most savings accounts will inevitably lose value over time, many ordinary savers are making the decision to do something else with it. The obvious question is what? There are many investment paths to consider, and their appeal depends on a mix of factors, including personal circumstances, age and attitude towards risk.
Stocks and shares:
Canny investors have certainly been able to make money on the stock market in recent years, despite the economic uncertainty associated with Brexit, a minority government and the growing prospect of import tariffs and other barriers to international trade. However, returns vary massively.
'Playing safe' has sometimes been associated with building balanced portfolios, perhaps with an emphasis on established blue chip businesses. Many investment houses promote investment trusts that prioritise shares in FTSE 100 firms. However, as brokers so often point out, there can be a trade-off between risk and reward. Playing safe might be the preferred option for many, but the returns are not always going to be impressive.
On 20th April, investment website The Motley Fool noted: "Overall, FTSE 100 stocks are now forecast to pay out a total of £87.5bn in dividends this year, at a yield of 4.4%."
That's ahead of inflation, certainly, and investors with large sums available might be pleased to achieve that. It's undoubtedly a better return than the sub-inflation rewards offered by most savings accounts. However , while it's certainly possible to achieve even higher returns, the risks tend to grow at a corresponding rate. Amongst families and individuals who may be considering where to entrust their lifetime savings, "higher risk" is not a phrase that many will want to hear.
Risk is inevitable in any investment but stocks and shares can be particularly vulnerable. Even businesses that appear utterly reliable can suddenly lose considerable value. Facebook's recent entanglement with Cambridge Analytica affords a good example, as does Volkswagen, which suffered a similar knock just a couple of years ago.
Today, with heightened international tensions and fears of a new cold war, together with growing protectionism on the parts of major players such as China and the United States, few will be predicting plain
sailing for most investors in the years ahead. And that's to say nothing about Britain's own difficulties over Brexit. Investing in stocks and shares still has its attractions, of course, and it will remain the favourite vehicle for some, but it is by no means a sure-fire win.
It will come as no surprise that we, at Residential Estates, favour property as an investment vehicle. However, our partiality shouldn't undermine the strength of the arguments that support it. We are in this business for a reason. Property investment has an excellent track record.
Let's look again at the yield that investors in FTSE 100 stocks are expected to earn this year. 4.4% is a healthy enough figure, and it stems from what can probably be regarded as a reasonably safe bet, underpinned by the reputations and solidity of the companies in question. But it's only 4.4.%.
Perhaps the most commonly regarded figure in property investment is capital appreciation, and expert opinions differ on how much property values are likely to rise over the course of this year. In December, for example, Halifax suggested that average prices could rise by up to 3% over the course of 2018. Earlier this month, Strutt & Parker predicted a rise of 2.5%, while Price Waterhouse Coopers (PwC) forecasts a rise of 4%. Knight Frank and Savills both predicted a more modest 1% growth in the market.
However, a focus on average price growth is misleading. Just as investments in shares must be carefully chosen and all the risks weighed, the same is true of property investments. Prices vary enormously by location - right down to level of streets and neighbourhoods - so any national averages are going to be so generalised as to be meaningless.
In previous posts, we have emphasised the importance of focusing on particular growth markets. We've highlighted Manchester, Birmingham and Chester as three good examples, but there are others.
Making good choices at this stage is vital when it comes to the question of capital appreciation, as Hometrack director, Richard Donnell points out. He notes: "...large regional cities could register price rises of up to 25% over the next two to three years. The likes of Manchester, Birmingham and Glasgow have seen market activity increase and this has delivered above-average price growth of 6% to 8% for the last 12 months."
Location, then, is key to earning good capital returns - returns which, alone, could substantially outperform the collective results expected from the FTSE 100. But capital appreciation is only half the story. Just as shares have intrinsic value and pay out dividends, so property offers capital appreciation and a regular monthly yield.
At a time when average house price growth is expected only to be modest, rental yields are the figures on which many serious investors are focusing. Property investment is a long term business and for those who intend to keep their interest in bricks and mortar, it's the day to day rental performance that makes a property investment pay.
Again, location is the key. In certain markets - such as Manchester, the Midlands and Chester - investors are securing properties that promise yields of between 5% and 8%, and that's on top of any price growth achieved by the property itself.
All told, the combined benefits of capital growth and rental yields make property one of the most attractive asset classes currently available to investors. Not only are the returns often very good, but rental demand is exceptionally high across the UK - and likely to remain so for many years to come. The private rental sector doubled in size over the course of the last decade, and Knight Frank predicts that it will grow a further 24% between 2018 and 2021.
What's more, with the support of a rental management agency, property can be made a true armchair investment; one that does not require frequent trading or constant monitoring of the market.
The buy-to-let market became more challenging in 2017 with the advent of various new tax hikes, but it remains one of the most popular forms of investment in Britain today. In December, The Economist observed: "These days one in 30 adults - and around one in four MPs - is a landlord. Roughly a third of them are retired, many having turned to the housing market as the returns on their savings dwindled."
Property investment therefore stands as an option that still stands up to scrutiny. Historically, it has performed well; it's no accident that property is often one of the most popular asset classes for institutional investors, featuring in major pension funds and the like. Returns vary by location but a well-chosen property should certainly outperform even the best high street savings accounts as well as the majority of options on the stock market.
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