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Residential Fact Sheet
Exploring residential
as an asset class: Long
term outperformance
Total Return by Asset Class
25.0%
Total Return (% p.a.)
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
1 Year
3 Years
5 Years
10 Years
Residential Property
Commercial Property*
Gilts
Cash
15 Years
20 Years
40 Years
UK Equities
Source: Acadametrics, ARLA, IPD, Barclays Capital, Hearthstone. Data up to December 2011
*IPD Monthly Index used for 1987 onwards
Market Analysis
Residential property has produced the best returns of the last
10 to 41 years. The chart above compares the annualised total
returns of residential property against commercial property,
equities, gilts and cash since 1971. It is clear from the graph that
the long-run performance of residential property is comparatively
excellent, producing better annualised returns than any of the
more ‘traditional’ investible asset classes. However, in the
short-run (one to three years) residential property has beaten
only cash. This is not so much due to the poor performance of
residential as to exceptional rebound gains in the other asset
classes over the last three years. These gains follow huge
declines in equity and commercial values during the financial
crisis in 2008 and net out to a broadly flat performance over
the last five years. In this time period, including the financial
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crisis, the consistent 4.5 per cent p.a. return of residential
property is bettered only by gilts, which outperformed by dint
of being the ‘go to’ asset in times of market uncertainty. Over
the longer term (10 – 40 years), residential property has shown
a much stronger performance than the four other asset classes
– and by a significant margin in some cases.
In the past, residential returns were governed primarily by growth
in capital values without much thought to rental yield. We feel
that the residential market is changing. As the stability and
long-term growth prospects for rental returns improve, investors
will increasingly look to the sector for income with capital
growth left as an inflation hedge. We envisage steady
– not excessive – increases in house prices over the near term,
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Ref: August 2012/HS004
Residential Fact Sheet
Exploring residential as an asset class: Long term outperformance
caused by a long-term shortage of UK housing. And these
moderate capital gains, when coupled with reliable income
returns, represent a compelling investment opportunity in the
private rented sector given its very low volatility compared
with equities and even commercial property.
Whether the investment management industry will seize the
chance to expose this asset class to the market on a wider
scale remains to be seen. If they do, the result will be a gradual
stabilisation of the housing market, a reduction in the importance
of high LTV mortgage lending (to prop up capital values with
inflows of first time buyers), increased social choice, and a more
confident marketplace into which developers can finally get
building – whether it be for traditional owner occupier clients
or the new wave of residential investment landlords. In any
case, we believe that residential property will continue to
provide both moderate capital growth and strong total
returns in the future over the long term and that it should
be represented in the line-up of funds available to investors.
Technical Background
Residential property is in emergence as an investment asset
class. Consequently, there is limited total return data available,
and in order to provide a realistic and informative long-term
data series, it has been necessary to combine different sources
of data. Our residential property total return is comprised of a
capital return taken from the LSL Acad house price index
(formerly the FT HPI) and an assumed constant gross income
return of 5.5 per cent (4.13 per cent net) until 2008. The gross
figure has been sourced from a GLA report, produced by Savills,
and reflects a 20-year average. The net figure has been
calculated by applying a 25 per cent discount to the gross
return, reflecting the approximate costs of property
management and maintenance in a large-scale residential
fund able to benefit from economies of scale. By using a
20-year, rather than the higher 30-year average of 6.2 per cent,
we are in fact presenting a relatively cautious view on historic
total returns. From 2008, ARLA buy-to-let rent figures (gross) have
been used and discounted by 25 per cent. The total return data
for commercial property has been sourced from IPD, while
equity and gilts data is from the 2012 Barclays Equity Gilt study.
Performance has been calculated on a per annum basis, with
2011 (the latest available annual data) as the end-point.
Important Information
Residential property prices can go down. Information on past
performance is not necessarily a guide to future performance.
The value of investments in a fund can go down, and there
can be no assurance that any appreciation in the value of
investments will occur.
Residential property values are affected by factors such as
interest rates, economic growth, fluctuations in property yields
and tenant default. Property investments are relatively illiquid
compared to bonds and equities, and can take a significant
amount of time to trade.
This information is intended for professional clients and investment professionals only and should not be relied upon by retail investors.
While all reasonable care has been taken in the compilation of this publication, Hearthstone Investments PLC will not be under any
legal liability in respect of any misstatement, error or omission contained therein or for the reliance any person may place thereon. This
report is published for general information only and while the report may be helpful in anticipating trends in the property market, no
warranty is given as to its accuracy, and no liability for negligence is accepted in relation to figures, forecasts, analyses or conclusions
in it. Under no circumstances must any of the content of this report be relied upon for investment purposes.
Hearthstone Investments PLC is the parent company of the Hearthstone Investments Group. Regulated business is carried out by
Hearthstone Asset Management Limited. Hearthstone Asset Management Limited is an appointed representative of Thesis Asset
Management PLC which is authorised and regulated by the Financial Services Authority (114354).
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Ref: August 2012/HS004