Investors need to revise residential property holdings

Simon Ibbetson

The findings of a new report into property by Standard & Poor’s (S&P) suggests investors need to review their current portfolio allocations to residential property due to the low yields currently being produced by the asset class.

The research house examined property yields in the current economic environment when compiling its report Asset Allocation: Standard & Poor’s Economic and Investment Market Strategy — March 2007.

In all, the study showed residential property yields were too low but unfortunately remained a cornerstone of many property portfolios as investors used a more subjective approach to allocating funds to this asset class.

S&P found that commercial property yields were stronger than those of its residential counterpart and that they were unlikely to fall below yields generated by cash holdings.

The report also found that while listed property markets performed strongly, Australian listed property trusts and US-based real estate investment trusts were the exceptions because of concerns over interest rates and valuations.

Hedge funds with equity-based strategies delivered the best returns, according to the research.

Commenting on the findings, S&P director of investment consulting Simon Ibbetson said: “It is striking that even in the buoyant context of the last 15 years, the current yield discount looks stretched.”

“Capital losses must now seem more probable than significant gains, even without a significant change in investor sentiments, economic activity, or lending conditions,” he added.