In this section we compare residential property with other asset classes.
Much of the data on this page was originally compiled in 2012 to illustrate the reasons for launching the TM Hearthstone UK Residential Property Fund. Investors can now find actual fund performance since launch in the fund factsheets, but we feel this information remains relevant when viewed alongside actual performance as it provides a valuable historical insight as to the investment characteristics of residential property.
Residential properties are essentially dwellings where people live – houses, bungalows, flats, apartments. Access to this investment opportunity historically meant buying a property to rent out, often with a view to future profit on sale.
Over the last few decades, more and more people have benefitted from a positive housing market either because they have realised profit or are sitting on large amounts of equity.
Whilst it is true that residential property can be affected by the general economic outlook – as has been the case recently – it has benefitted from historically lower volatility and higher growth than other asset classes.
The chart below also shows that residential property doesn't tend to react in the same way to economic factors as other asset classes do - it has a low correlation with the stock market, for example - which can have the effect of making investment portfolios containing residential property more stable than those that don’t.
Commercial properties could be described as places where people work – offices, factories, industrial complexes, shops, shopping centres, leisure centres, some schools and hospitals. Direct investing tends to be the preserve of the large financial institutions, but there are some avenues for private investors to take advantage of this asset class, largely through a variety of commercial property funds available in the retail investment market
Commercial property values & yields tend to be more affected by the general economic outlook. In periods of low economic activity, people have less to spend and companies may be in less need of employees and subsquent premises. Also, there are limited buyers for each property and the market is less liquid than that for residential property. For these reasons commercial property is generally considered a higher risk than residential property.
Equities (Stocks and shares)
Buying shares in companies and ‘betting’ on the success of those companies can deliver significant rewards. But as recent evidence has shown, equities are affected - almost on a day-to-day basis - by influences far greater than national economic factors.
A positive economic outlook, a company’s excellent trading results, the appointment of a new sharp-shooter or the launch of an innovative product can make investments in stocks and shares soar.
By the same token, a change of Government, an armed conflict in the Middle East affecting oil supplies, or a negative public relations story can have the opposite effect.
For these reasons equities are considered a higher risk.
The above chart shows risk adjusted returns for residential property compared to other asset classes. The chart indicates how property has historically delivered higher returns without additional risk compared to other assets.
Risk adjusted returns factor in the amount of risk taken to achieve a return – for more on this please see the Glossary
Fixed interest (Bonds and Gilts)
This type of investment is generally in the form of a Bond issued by a company, a Gilt issued by a government or an international organisation such as the European Central Bank. Exposure to this market can also be obtained via fixed interest funds issued by various fund management companies or banks and building societies.
With a Bond, an investor to all intents and purposes ‘lends’ money to the issuer for a fixed percentage rate of return, over an agreed time period until maturity when the original capital is returned.
Fixed interest investments are considered as low risk overall. However the income paid usually reflects any underlying risk that the issuer may default. So generally the higher the income on a fixed interest security is the higher the market perceives the risk. Investors in bonds should be prepared to accept some risk as there is no guarantee of their capital should an issuer default.
UK Government gilts are usually rated lower risk than a corporate bond which isissued by a company.
Of all the popular asset classes, Cash is considered the lowest risk. This is reflected by the interest paid, and that interest is directly affected by interest rates. Most recently, UK interest rates have been at a historical low, putting pressure on savers as the returns on their savings are not keeping pace with inflation.
With cash, there is no increase in capital values unless interest received is reinvested into the cash holding.