3 things you need to know about wealth preservation, in an uncertain market
Investing in UK property has long been seen not only as a rite of passage, but as a signifier and determinant of success for potential investors from around the world. It has attracted global interest for decades because it has offered income, an easy way to grow your wealth, and stability.
During the past couple of decades, the market has been strong. As a result, even inexperienced or armchair investors and developers have been able to achieve double digit returns, often with relatively little technical knowledge, for example through simple refurbs, and creative financing.
The goal of preserving, and sustainably growing wealth has been seen by many as not exciting enough to attract their attention. Or it may have been seen as a strategy for later — relevant only to investors once they have made their money, and are super rich.
It is true to say that many of those who have openly prioritised wealth preservation over this period had already made a lot of money — think of the strategies typically recommended by private banks such as Rothschild and Coutts, and the fact that almost every Rich List name stores a large part of their wealth in property, to preserve it safely.
But it is increasingly relevant for all potential UK property investors… So if you like the idea of investing in property, what do you need to know right now about wealth preservation, in this undeniably uncertain market?
- It’s not boring
The tide is turning. Slow, genuinely passive investment strategies focused on the preservation and sustainable growth of wealth are becoming increasingly attractive, in an uncertain market, to investors of all scales.
Single digit returns, underpinned by low leverage, and no development risk, are a compelling offering for long term value investors such as Warren Buffet and Charlie Munger; and increasingly, for investors in the UK residential property market, at all scales of investment.
This approach to investing — slow and steady — is no longer the reserve of an already wealthy elite. And few can argue that it’s boring being able to put money in, then take more money out, without too much hassle or risk. Wealth preservation is an increasingly well-respected objective, for investors of all levels, as the risks associated with more ambitious strategies have increased. This is true, regardless of what investment opportunities attract the biggest headlines.
2. Slow and steady wins the race, especially in an uncertain market
The UK residential property market is fast-changing and increasingly complex, meaning approaches which once seemed to guarantee success are no longer viable, or have significantly higher risks associated.
In this context, the preservation and slow, steady growth of wealth is arguably an even more relevant goal than in the past.
Risks and costs have risen as a result of dynamics such as:
- Prolonged uncertainty — both economic and political. From Brexit to the cross-party political will underlying regulatory changes, uncertainty increases risk and reduces returns. Strategies relying on transactions and confidence are becoming less successful.
- A strong, fast tide of regulatory changes — Section 24, Stamp Duty Land Tax change, increased scope of licensing, tighter lending standards. These changes have increased costs, and therefore reduced returns and the likelihood of ‘passive’ investors earning returns above other asset classes, sustainably. They have also increased compliance risk associated with investing: the cost of getting it wrong is increasingly relevant.
- Demographic trends — tastes, preferences, and affordability considerations have all changed dramatically. For millenials, life is for living and access is favoured over ownership. The same goes for transport as for housing — and investing. Having access and freedom of choice is preferable on so many levels, a fact exaggerated by the obvious affordability constraints. Selling a property is inevitably becoming more challenging because of that.
As a result, what once worked may no longer be so effective. Risks are higher, costs are higher, and returns are both lower and less predictable. To get technical, the risk-adjusted return of more ambitious strategies has fallen. So strategies focused on minimising risk begin to look comparably more attractive.
What you need to know is, in the current market context, a slow, steady approach targeting wealth preservation and growth may be an even more suitable goal than previously. Risks have increased, and the risk-adjusted returns of alternatives have fallen.
3. Targeting the preservation and steady growth of wealth can help investors avoid common, expensive mistakes.
The scary truth is that potential investors are facing the prospect of low, no, and negative real returns, through strategies that may have been successful for themselves and others in the past.
The investors I work with typically have access to £1–15m of capital; as a result, they could easily be losing out on hundreds of thousands of pounds each year by not investing sensibly, or even not investing at all, and waiting for an opportunity promising double digit returns.
The moment when these investors realise they stand to lose money, is the moment where they want to know about wealth preservation and growth, and lose interest in shiny objects.
Making poor investment decisions can lead to not only expensive mistakes, but also to deep frustration.
I’ve focused on UK property, since a RICS-accredited degree from Cambridge, and have acted as and for investors across £13m+ of investment and development projects in that time. Through this, I have witnessed 7 common, and expensive mistakes.
Taking a long-term, value-focused approach to investing can save you from making these mistakes:
- HEART OVER HEAD — investing emotionally, rather than strategically. By this, I mean following the heart and focusing on what you know and like, even if that doesn’t necessarily offer genuine value, because it feels comfortable.
Some common examples of ‘heart over head’ property investment choices:
- Diving in, and not doing enough research out of a fear of missing out
- Dithering, and doing too much research, out of a fear of getting it wrong
- Investing in what you like, or making decisions driven by ego — for example often unproven prime new build rental properties marketed as brilliant rental properties, with no respectable evidence
- Investing in what you know — for example property close to home — because it feels more familiar and safer and, if there’s a problem, you’re close by. Which doesn’t necessarily mean that it offers good value. If you have a good property manager, you don’t need to be located nearby.
- Investing in what you want to use — for example buying a property you could also use as a holiday home or your children could move in to — It’s tempting to go for something that could work as a home and/or a buy to let or holiday let. Sometimes this means making sacrifices all round, and generally the results are very different than those from a pure investment decision from a profit and risk perspective
2) MISUNDERSTANDING MARKET TIMING — In some ways, property investment is like having children, in that there’s never a ‘right’ time. People get stuck and don’t take action because they feel like it’s too late and they have missed the boat. It’s a nervous market out there at the moment. There’s always some reason to feel like it might be better to wait, no matter when you’re looking to invest.
Let’s not forget that the UK has a massive shortage of high-quality, affordable property — and that’s not going to change for the foreseeable future. And for many savvy value investors, the perfect time to buy is when others are nervous.
By not investing — or not investing now — the chances of you earning low to no real returns on capital, and the chances of future frustration only increase.
3) EXTRAPOLATING MARKET TRENDS — Contrary to what some capital-dwellers believe, there is a whole country out there, beyond Greater London. It can be easy to think that the London property market reflects what’s going on in the rest of the country, but that’s simply not the case.
- London, for example, has its own unique property micro-climate, including property prices and trends, infrastructure and demographics.
- It’s not just geographical trends: there’s the tendency to look at past performance and expect that future performance in an area, or a strategy, will be the same.
- As a result, investors can over-invest in headline-grabbing ‘hotspots’, and underinvest in areas with strong, long term fundamentals
4) SPECULATION OVER PATIENCE — investment opportunities with high potential returns, by definition, look great. At first glance. In practice, all development projects involve some element of speculation. Even with the most accurate data and intelligent developer, the time lag between an investment being made, and project completion can result in divergence between forecast and actual returns. I don’t know a single developer who has not been affected by this time lag, and there are plenty of other factors that might affect your return on investment. The mistake many investors make is taking on risks, without realising there are potential downsides. There is no return, without risk.
5) BELIEVING MANTRA OF CAPITAL GROWTH — It’s a mistake to assume that property will always grow in value. There are so many factors that can affect value, and one thing’s for sure — even if transactions slow, the market doesn’t stay still.
Affordability constraints are a major issue, and they are not just affecting young people. Earnings and restrictions on finance will fundamentally affect capital value trends; assuming future capital growth beyond what people can afford is likely to lead to disappointment.
The mistake investors make, is assuming that property will always grow in value, and allocating capital based on past rather than current and forecast market drivers.
6) SHINY OBJECTS — There’s always the ‘next big thing’ in property investment. Should you invest in Serviced Accommodation, HMOs, or a crowd-funded development project? You might have friends who are investing in a new property strategy and think that it might work for you.
The mistake investors make is investing in what is popular — whether with their social circle, or in the press — rather than based on market fundamentals and a clear strategy aligned with their goals, starting point and the current market context.
7) MISTAKING PRICE FOR VALUE — This is so common. Price has little bearing on how well a property investment will hold its value long-term. ‘Value investing’ is a simple, time-tested method that applies just as well to property as it does to other forms of investment, like stocks and shares. When it comes to selecting the right property investment, it’s vital to understand that just price is not the same as the value on offer. Mistakes commonly made include choosing ‘cheap’ properties, rather than ‘under-valued’ properties; and thinking the price tag listed on a property on Rightmove or Zoopla reflects true market value.
Conclusion
What you need to know right now about wealth preservation right now, in an undeniably uncertain market, is that:
- Although wealth preservation and growth is not often considered to be a ‘sexy’ property investment strategy, that doesn’t make it boring, or exclusively relevant to already wealthy investors
- In an uncertain market, a slow and steady strategy wins the race; and a focus on wealth preservation is a worthy investment objective
- Focusing on longer term wealth preservation and growth can help investors avoid common, often very expensive mistakes
About the author:
Anna Clare Harper is a Real Estate Investment Strategist, Investor, Entrepreneur and Podcast Host.
Her business, Anglo Residential, has recently secured £6m of seed funding to build a £100m portfolio. By investing in high income regional residential property, it aims to deliver stable, long term profits in an uncertain UK property market.
Anna’s vision is to use investing to help reduce inequalities of opportunity for 1 million people, in line with the UN Sustainable Development Goal of Reduced Inequalities.
Contact: www.annaclareharper.com
