Why invest in property?

Asset classes are an important concept for all investors to consider. Each asset class, such as investment property, is differentiated by three factors that characterise its investment performance. These are:

• The historic level of return that the asset class has delivered
• The historic level of risk that the asset class has experienced
• The level of correlation between the investment performance of each asset class.

Each asset class has a significantly different level of risk and return, and each asset class has a low level of correlation to each other.

Investors can use these differences in performance to consider how likely their investments are to meet their objectives and appetite for risk.

It can be possible to even-out investment performance over time, by spreading investments across different asset classes.

For many years the only three generally-recognised asset classes were cash, equities and gilts. In recent years there has been a general trend to recognise a range of alternative asset classes that show particular and different investment performance. An example is fine art.

However, many of these asset classes are either esoteric or not open to most investors. In parallel, property has become recognised over the last 20 or 30 years as showing alternative characteristics to the three historic asset classes. As property has gained in popularity, it has become recognised as a core asset class in its own right.

Further information

For more information on investment objectives you can look at the IPD UK Annual Property Index - December 2008

IPD UK Annual Property Index - Dec 2008

Sub-classes are the divisions of asset classes into smaller groupings of assets that show either: a set of characteristics that differ from the majority of the assets within that class, or a tighter correlation than the asset class as a whole. An example of a sub-class is REITs - these differ from other forms of property investment because they tend to be listed equities, and therefore are different from direct property investments.

Sub-classes are similar in concept to the sub-sectors of the core property sectors.

Sub-classes are of interest to investors because investing in a sub-class of an asset class may produce different outcomes than might be expected from more generic investment in the relevant asset class. For example, REITs are often referred to as a sub-class within property because, as listed vehicles, they share some investment characteristics with equities, particularly in the short term, whilst in the longer term they share more investment characteristics with direct property investment.

One of the reasons to consider investing in property is that both commercial and residential property investment have produced very good returns compared with the other core asset classes.  Although these returns have been poor since 2007, they still compare favourably over the long term.

Commercial property offers the potential of predictable long-term income with the opportunity for some capital growth. In general, commercial property should be seen as a long-term investment that offers slightly more risk than gilts, and less risk than equities, in return for returns that are higher than gilts, and less than equities.

Residential property has offered even higher returns, but most of this has been in the form of capital gains through rising house prices and, as a result it has historically been less reliable than commercial property.

Further, because property as an asset class offers diversification, it offers different performance characteristics and low correlation compared with the other core asset classes. See further questions on diversification for more information.

Further information

For further details of actual and comparitative returns refer to the IPD UK Annual Residential Investment Index