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Insight & Opinion

Income producing property: Which assets perform better than savings accounts?

Author: Jerald

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For years, people who had money in savings in the UK would have no better option for seeing their money grow over the years than to put it into a high-interest savings account that would allow them the peace of mind that their nest egg was safe and working for them.

However, in recent times, this has changed. With the base interest rate now at its lowest in history (0.5 per cent), a level which it has been at for more than five years, people are less likely to get themselves the sort of favourable interest on their savings that they could just a few years ago. It has led more people to other assets, of which property investment has become key, and thanks to new developments, this is something that could become even more prominent in the months to come.

The Bank of England recently put the UK’s financial sector under stress tests in order to see how it would be able to handle any downturn in the UK’s economy, and whether it would withstand it better than it did in 2007.

And while the central bank said that it is generally happy the banking sector is in a much stronger position than it was in 2007, and would more than likely be robust enough to withstand downturn, there are still concerns. The tests showed that many banks either marginally passed or failed the stress tests.

In the test, which looked at how well a bank could handle a 35 per cent drop in house prices, a 30 per cent fall in the value of the pound and a rise in unemployment to a level of 12 per cent, the Co-operative Bank failed, while the Lloyds Group and RBS were adjudged to be at risk.

So with this financial uncertainty likely to mean that people are not going to be turning back to the traditional savings account any time soon, what will we see moving forward? The likelihood is that the safe havens of the property market will continue to offer strong returns to investors. So what are these?

Student property

Without a shadow of a doubt, student property has been the shining star of the UK investment market in the last three years, with over £6 billion being invested in the sector between 2011 and 2014. It offers yields of between seven and nine per cent in some of the strongest markets around the UK, so presents landlords with the chance to make a strong return.

But student property is about more than just short-term returns, and the fact it is one of the safest options around is likely to mean that it continues to be a strong income producing option for years to come.

The reasons for its safety is quite simple – student demand is evergreen. Regardless of the financial situation elsewhere, there will always be students, and they will always need somewhere to live – invariably in the private rented sector.

Even when the student sector was hit hard – the increase in tuition fees in 2012 saw some institutions witness 20 per cent falls in applicants – the rental market has remained strong (investment levels grew), and now that the higher education market has weathered this storm and seen large increases in student numbers to bounce back, it’s even more likely that the strength we’ve seen in student rentals over the past few years will continue. This will make it a strong investment option that performs not only better than savings accounts, but also has far more security.

Buy-to-let

Although the buy-to-let market is not as strong as student property in terms of the income that can be made, it is still a very safe investment option, particularly when we look towards larger multiple-occupancy units such as apartment blocks.

In these types of structures, investors often have the chance to get their hands on units for far below market value by buying early. What this means is that they can achieve high yields, often in excess of the six per cent that is generally the average of the rental market. In fact, with some investment options of this type, property management companies will even offer buyers incentives such as a fixed assured return for a number of years, which provides long-term peace of mind.

Looking ahead, the rental market also has some real long-term prospects as well. While some of the major banks not be set up in a way that would protect people’s funds in savings accounts, the private rented sector continues to look stronger.

In the past few years, we’ve seen the rise of generation rent – a group of younger people in big cities in particular who want to rent rather than buy because it offers them the chance to move freely when looking for new jobs or simply to change where they live.

The change in sentiment towards buying a home has seen the number of Brits who have purchased their own property fall from a peak in excess of 70 per cent to around 60 per cent in the last few years. Following the markets in Europe and the US, where the majority of people rent for life, it’s likely that this will continue in the UK, giving the buy-to-let market real prospects for continued strength across the next few years.

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