While it is true that the UK and Malaysia have a long-shared history and that the UK is a popular destination for university study for many Malaysian students, property investment eventually boils down to numbers.
Here are three compelling reasons why UK properties offer your portfolio a much better return compared to investing in the stock market.
Property Appreciation a Hedge Against Inflation
According to PropertyGuru’s Malaysia’s Consumer Sentiment Study for the first half of 2022, 53% of Malaysians see property investment is one important way to hedge against inflation because real estate usually appreciates over the long term.
Malaysia’s projected headline inflation rate is expected to remain between 2.2% to 3.2% this year. Meanwhile, inflation increased to 2.8% in May from 2.3% in April. Maybank Investment Bank forecasts an inflation rate of 4.1% in 2023.
In the UK, the Bank of England has raised interest rates from 1% to 1.25% to slow down inflation. Raising the interest rates would help the pound appreciate which would give Malaysian investors additional yield from this appreciation or at least protect some of their returns.
Limited Supply driving Price Appreciation but Rental Market is Stable
The climb in the prices of UK properties has been driven by low supply. Property consultancy JLL predicts that Birmingham house prices will rise more than in other UK cities. It expects the average value of a home in Birmingham to increase by 4.9% annually over the next five years. Manchester on the other hand is expected to have a cumulative price increase of 17.1% between 2021 and 2025.
According to Savills research, London house price growth is seen to yield a return of 12.4% between 2021 and 2025, while UK house price growth is seen to be at 21.5% for the same period. The average property price in London has increased by 67% since 2010.
While UK property appreciation has been driven by limited supply of apartments, the rental market continues to be stable and there is plenty of runway for UK apartment prices to increase further in the next few years.
Stable Rental Returns
UK properties, in particular London properties offer a solid return of up to 4% – 4.5% gross yield in terms of rental return on investment. This makes properties a safe investment in these uncertain times.
The UK is home to many excellent universities, and this keeps rental opportunities stable. With demand outstripping supply, tenancy lengths continue to rise as tenants renew their lease contracts to avoid the likelihood of paying higher rent in a new place.
Global Stock Markets Routs & Recession Fears
It has been a bear market globally for stocks. The S&P 500 Index has been down in 10 of the past 11 weeks and has lost 5.8% since March 2020. The MCSI global stock index has been down 20.9% since the start of the year.
Recession fears are on the rise as major central banks look to raise interest rates to tame down the skyrocketing inflation. This will raise borrowing costs and therefore tame economic activity. The S&P 500 has lost more than $7 trillion in market value since the start of 2022. This represents a decline of over 20% since the start of the year marking its entry into bear market territory.
Nomura expects the eurozone, the UK, Japan, South Korea, Australia, and Canada to enter a recession together with the US. They expect the US to contract by 1% in 2023.
Bleak Future Ahead
While value investors might look to the stock market for bargains, it looks like the worst is yet to come. Better put your investment funds into something more tangible and inflation resilient like properties. You have a higher chance of beating the domestic inflation rate compared to placing your funds in the equities market.