London residential property

London residential property

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A proven track record of capital growth

BY: JAMES GLEW
RESOURCES: INVENTURE PROPERTY, UK land Registry

London residential property has a proven track record as a secure, high performance asset class.  In this article I look at how it has performed over the past 20 years.

The slowing global economy, volatile stock markets, low interest rates and the questionable long term impact of quantitative easing are driving investors from all over the world to seek out safe haven investments.

South African investors are also concerned with the further weakening of the SA economy and the Rand. In my view, taking both global and local economic factors into account, London bricks and mortar will continue to be an attractive long term investment and ZAR hedge. Of course this is always in the context of a diversified investment portfolio. From a risk management perspective it is never good to put all your eggs in one basket.

As is frequently stated with regards the various investment options we have to consider, past performance is not necessarily an indicator of future results, and while this is true, I do believe that it would be foolish not to consider past performance as part of any rational investment decision.

As a South African investor looking at the UK for a ZAR hedge, the choice would probably be between equities or property. Equities offer both capital growth in the form of increasing share prices and yield in the form of dividends. Property offers capital growth in the form of property price increases and yield in the form of net rental income. I have focused on residential flats in London as a future hedge, given the strong tenant and property demand in London, relative to the rest of the UK. Looking simply at capital growth, being share price escalation and housing price escalation, over the past 20 years paints a pretty clear picture.

Share price performance:

As can be seen in the graph below, the FTSE 100 share index has grown from a base of 100 in 1996 to 175 in June 2016. The index curve shows significant volatility, peaking in 1999 and then falling back dramatically. It has yet to recover to the 1999 level.

London residential property price performance:

From 1996 to June 2016, London flats’ average prices have grown from a base of 100 to 597. The index growth curve is relatively stable with the only significant dip coming in the 2008 financial crisis, thereafter it recovered strongly. It is worth noting that most market commentators are saying they do not believe the impact of Brexit on London property prices will be as strong as the impact of the 2008 financial crisis was.

South African residential property price performance:

To take the impact of the falling ZAR into account, we have used the average price of a medium size house in South Africa, converted to GBP at the exchange rate ruling in each year. The average medium size South African home has increased from a base of 100 in 1996, to 247 in June 2016.

Graph: London residential housing price index versus FTSE 100 share index versus SA house price index 1996-2016[/vc_column_text][vc_single_image image=”2937″ img_size=”full” alignment=”center”][vc_column_text]

To take the impact of the falling ZAR into account, we have used the average price of a medium size house in South Africa, converted to GBP at the exchange rate ruling in each year. The average medium size South African home has increased from a base of 100 in 1996, to 247 in June 2016.

Graph: London residential housing price index versus FTSE 100 share index versus SA house price index 1996-2016[/vc_column_text][vc_single_image image=”2938″ img_size=”full” alignment=”center”][vc_column_text]

Conclusion:

By this measure, over the past 20 years, London property comes out the clear winner when it comes to capital growth. This is no guarantee of future results, but does point to a very strong track record. Adding to the property argument, the ability to sensibly gear the asset at interest rates below the long term appreciation rates makes for exciting investing in a global currency.

James Glew CA(SA)
www.inventureprop.com[/vc_column_text][/vc_column][/vc_row]

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