Getting to grips with property
A real-estate investment trust could be a good way to include property in a well-diversified portfolio, says Brewin Dolphin
PROPERTY has been a favourite investment for the past 20 years, even if it isn’t always the easiest to access. Stamp duty in Jersey and Ireland is considerably lower than in the UK, where the Government introduced a punitive tax regime for buy-to-let investors and buyers
of second properties—the net result is that many previously profitable properties are now losing money. The increase in up-front costs, together with a cut in tax breaks, has pushed property out of reach for some, leaving them unable to capitalise on what many view as one of the safest investments you can make.
However, not only is buy-to-let now a much less attractive proposition overall, direct ownership of an individual property is often more trouble than people envisage, with agent’s fees, maintenance costs, accountant’s fees and other outgoings all slashing returns. If managing the property yourself, frequent trips to fix broken appliances or dealing with difficult tenants can make owning a property a real headache.
Additionally, property is not quite the ‘safe’ investment that many people think it is. In Jersey, property prices rose steadily until 2008, but have subsequently remained relatively stable. UK property prices have actually been quite volatile over the past decade and many areas have missed out on the meteoric price rises seen in greater London. In Ireland, the bursting of the property bubble 10 years ago is an oft-repeated cautionary tale about the dangers of following the crowd.
If we change our focus to commercial property, this has also had good years and bad over the past decade, sometimes outperforming other investments and sometimes underperforming. Certain shocks to the system, such as the credit crunch in 2008 and the result of the Brexit referendum last year,
‘The bursting of the property bubble in Ireland is a cautionary tale’
took a particularly hard toll on commercial property values as prices are intrinsically linked to growth within an economy and take into consideration future demand dynamics. Indeed, other investments have outperformed property, begging the question whether it should rank so highly in terms of desired investments. Over the past five years, for example, UK house prices have risen 37% on average, outperforming one of the two main UK share indices, whilst significantly underperforming the other. The FTSE 100 and FTSE 250 have seen increases in value of 27% and 71%, respectively.
That said, property remains an attractive proposition over the long term. A chronic shortage of housing mean that fundamentals are there to underpin asset values and rents should continue to rise over time.
Given that, where should property fit within your portfolio? Like any asset, it should form part of the overall picture of your wealth and needs to be considered when talking about family financial planning as it may be subject to inheritance taxes in the UK and Ireland (but not in Jersey). Also, unlike other assets, it can’t be divided up between children.
Having an investment property—or a few of them—is definitely not a bad thing, but what investors need to bear in mind is that property isn’t like stocks and bonds. If you want to help your son or daughter get onto the property ladder themselves or wish to help fund your grandchild’s university education, you can’t simply sell an extra bedroom or that conservatory you never use in order to make it happen. You could, however, sell some shares that have performed well over the past few years.
If all of this makes sense, but you still don’t want to miss out on rising property prices in Jersey or elsewhere, investment funds such as real-estate investment trusts (or REITS) are a great alternative. REITS and other property funds can invest in both residential and commercial property, but have the added advantage of being traded on the open market just like stocks and bonds. You can buy into or sell out of them at any time, meaning you can lend a helping hand for down payments or school fees at your discretion.
As regards residential property investment, eventually, most purchases will probably rise in value. However, rather than viewing houses first and foremost as investments, perhaps it’s sensible to remind ourselves from time to time to look at our homes for what they are: buildings the primary role of which is to protect us from the elements, keep us warm, make us feel safe and bring us pleasure. They’re a place to enjoy life and make memories with family and friends, in Jersey and elsewhere. The value of investments and any income from them can fall and you may get back less than you invested. Past performance is not a guide to future performance. Performance is shown before charges which will have the effect of reducing the illustrated performance. This information is for illustrative purposes only and is not intended as investment advice. Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on current legislation and your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser. The opinions expressed in this article are those of Mark Miles, not necessarily those of Brewin Dolphin Ltd.
Back to the island: property prices in Jersey rose steadily until the credit crunch in 2008 and have remained relatively stable since then
Mark Miles, Head of Office at Brewin Dolphin Jersey
UK house price changes, year-on-year
Many people like the idea of investing in property, but a real-estate investment trust could be an attractive alternative— without the ties of managing another house