We look at how UK property investments have performed over the long term.
It has been an interesting and sometimes turbulent past few decades for property investment in the UK.
Studies in UK equity have shown that the property market has delivered a high amount of growth over the past 30 years in total, growth of 1433% to be precise. The latest figures from the Office of National Statistics show that UK average house prices increased by 2.5% over the year to August 2020, up from 2.1% in July 2020.
However, when looked at more in-depth, the wider picture is more complex than a simple story of pleasing growth.
In order to understand how British property has performed as an investment over the years, it is important to take several factors into account, including the effects of the 2008 financial crisis, the way in which investors handled their dividends and also the differences in performance between commercial and residential properties.
The effects of the 2008 financial crisis
No discussion of the United Kingdom’s property market – or indeed of any investments across the world in the past 25 years would be complete without an analysis of the impact of the 2008 financial crisis.
2008 was a year that saw house and other property prices in the UK drop dramatically. This had the effect of scaring off some property investors but attracting others.
To be more precise, in 2008, house prices dropped by over 16% – and this was notable as it was the largest drop in a calendar year in the UK since records began. In December of 2008 alone, house prices fell by 2.2%.
The luxury property market was also affected, though the higher ends of the luxury property market in the UK escaped the worst effects. Though the percentages cited above are the values for residential properties specifically, this reflects an overall fall in property prices in 2008 across the property market in Britain.
Property prices had been rising steadily since at least the mid-1990s and as a result, the slump in property prices in 2008 was somewhat cushioned. These prices did not hit absolute rock bottom – but they were set back to 2004 levels, which, given 2008 levels of inflation, made property harder to invest in than in 2004.
This had several implications, which potential home buyers were all too aware of, such as a sharp drop in the number of approvals for mortgages. For many people, this put them off initially investing or continuing to invest in property in the UK.
However, for those who could afford it, the property market suddenly became a great place to snap up a good investment for the future, with less competition for property investments than there was in 2007. As house prices started to pick up and to climb definitively once more in 2009 and 2010, those investors who could afford to invest in the UK’s property market back in 2008 began to reap the rewards of their decision.
The question of dividends
Wise investors in the UK property market over the past 25 years will have found that their property could make them plenty of money. Moreover, these returns could have been stable throughout the past two and a half decades as long as one rule was adhered to: that dividends were re-invested in the property market.
It sounds like a very simple rule but this was in fact the governing principle of good practice among property investors in the UK market over the last 25 years. Even during the financial crisis of 2008 discussed above, returns on property would continue to stay healthy as long as dividends were reinvested.
However, it is also the case that the 2008 crisis made many property investors rather jumpy, if they did not pull out of the property market altogether they nevertheless began to reinvest their dividends in other investment sectors.
As a result, their investments in the property market became less and less valuable and many investors attributed this to the weakness in the market as a whole. However, if they had continued to reinvest their dividends in property, it would have been a very different story and they would have achieved a greater return on investment (ROI).
Those who reinvested their dividends even managed to beat the rising inflation at the start of the 21st century. Returns averaged at 83% even during 2008, and many soared to about 130%. As hindsight can be beneficial for property investors in the present day, a key lesson about handling dividends can be drawn by looking back over the past 25 years of property investment in the UK.
The differences in performance between commercial and residential property
The UK property market has long been a diverse one and one of the key divisions has been in the different performances of commercial and residential properties in terms of the market for investments. As we have seen above, the residential sector suffered something of a struggle in 2008 but as long as investors reinvested their dividends, in the long term, their investments continued to be profitable.
The commercial property sector has grown and grown over the past two and a half decades in the United Kingdom. Office spaces and retail spaces have, for at least the last 15 years, been one of the most popular types of commercial property to invest in. Until about 8-10 years ago, it used to be the case that retail properties were the most popular investments, with office spaces representing the second most popular investment opportunity in the commercial sector.
In the present day, however, these two types of commercial property have swapped places and office spaces are currently the most attractive commercial properties for investors in the UK market. Retail comes a close second however and industrial or warehouse spaces are the third most invested in commercial property in the UK. Figures from 2013 for example demonstrate that 41% of commercial property investments were made in the office sector, 39% in the retail sector and 11% in the industrial and warehouse sector. Miscellaneous other commercial properties account for the remaining percentage points.
The commercial property market in the UK has grown very much over the past decade. For example, in 2003 it was worth £245 bn, whilst in 2013 its value had risen to £385 bn and in 2016 it was put at £883 bn. Commercial property still accounts for 13% of the value of all buildings across the UK in 2020 and is now worth almost £900bn.
Whilst capital returns on property slipped into negative numbers in the late 1980s and in 2008 (of course, as the financial crisis hit the retail and office sector the hardest), overall the commercial property market in the UK has remained a positive one. All commercial income returns in the UK have remained positive over the past 25 years for example.
Moreover, investments in commercial properties have performed well and similar to equities and bonds in the UK. In 2004-6 for example, commercial properties, equities and bonds all peaked before suffering a sharp dip – almost in tandem – in 2008. As such, it was never ‘wiser’ to invest in equity or bonds compared to commercial property in the UK over the last two and a half decades.
What we can draw from the analysis above is;
- If dividends are reinvested back into the property market and not invested elsewhere, investors will find that they have stable, healthy returns from their investments in property. The problems start when dividends are not reinvested – then property (both commercial and residential) can even lose investors substantial amounts of money.
- Though the 2008 financial crisis did hit property investment in the UK hard and decreased the pool of investors involved in this market, the market has bounced back. Again, reinvesting dividends was key here for investors who wanted to be able to pull through the crisis.
- The commercial property sector over the last few decades has grown considerably. A key change that occurred around a decade ago was that office spaces became more attractive to investors than retail properties – but only marginally so. This may well be due to the credit slump as fewer consumers hit the shops during and after 2008 and the continuing rise of online shopping.
However, the strong performance in past years of the office property sector within commercial markets in the UK may well nosedive now due to the current Coronavirus pandemic that could see more people working from home in the future.
In summary, it is clear that the current pandemic could affect the UK property market moving forward.
Over the last 50 years, property prices on average have doubled every 10 years.
Retail property has taken a battering in recent years due to the growth of online shopping and this could be further affected if people are encouraged to work from home more (less footfall in town centres) and if regular lockdowns become the norm.
A recent survey by Savills found that 72% of the retailers who responded to the survey said that they had already approached their landlord for a deferment or a rent-free period on some of their leases.
There are many ways to invest in commercial property, the two main strategies are directly by investing in physical “bricks and mortar” and indirectly by investing in stocks, shares and commercial property bonds.
It is always worthwhile reading not just the FTSE Index but also the FTSE returns index when investing in property in the UK. This is certainly the case where dividends are concerned.
Investing in property in any market should be viewed as a long term investment strategy. This is an investment which, once made, should be stuck with if the investor wants to get the very best returns on their money.