Business Weekly - Cambridge, UK

The recent events in America have created, understandably, more unease and all forms of investment levels are slowing. Businesses are weary of entering into high-risk situations and private investors are being advised against moving into equity markets.

Clearly, the property market offers a different kind of investment. Property may be bought for many purposes, other than investment. A business needs property for production, human beings need it for shelter, and for investors, property provides a stream of income.

For a business acquiring property, the investment may produce a return on capital by when it is resold, which may exceed the original investment.

At times of instability, property is a tangible asset - bricks and mortar - providing more of a safe haven when other investment faces an uncertain future.

To an investor, property looks attractive, with interest rates on borrowing at an all-time low since 1965, of around 6 per cent while property yields average 7 – 8 per cent.

On most reasonable quality investment properties, there is an immediately attractive return derived from the property, which is greater than the interest payable on the borrowed money for that investment. By minimising the cash invested and maximising the borrowings the more sophisticated private investors significantly enhance their returns.

Simplistically, if the price for a small retail investment is £100,000 and you borrow £75,000 from the bank at 6.5 per cent, your interest payment would be about £5,000 per year.

The yield for this type of investment is typically about 8 per cent if well-let, which means an income of £8,000 per year to the investor. The “return on equity” would be 12 per cent per annum, which is the £3,000 per year surplus as a proportion of the cash invested.

Property is not without risks but when compared to equities it has the relative certainty of the income, which is usually reviewed in an upwards only direction. Also, the capital value is much less volatile.

Commercial property is usually regarded as a low to medium risk asset when compared to bonds at the least risky end of the spectrum and equities at the most risky.

The rapid changes affecting society and an uncertain future, challenges the perception of investment and the role of property.

Property looks to have clear advantages over equities in the near term, particularly while borrowing rates are so low. Property yields are quite high and there is also the prospect of rental growth and, with it, capital appreciation.