Investors looking for yield are facing tough times with many key asset classes facing major challenges. A quarter of all global government and investment grade bonds now feature negative yields.
With a savings glut of money looking for returns, what are the options for investors as they balance the need for liquidity, security and yield? What should general investors do to increase their returns at a time when they are struggling to match pension and insurance liabilities?
One argument is that the stock market still offers good investment prospects. The FTSE All Share Index has seen returns of 10%-plus this year but there are growing concerns over the UK economy triggered by macro factors and the long shadow of Brexit.
Although output grew by 0.3% in July compared with the previous month, this was attributed to the UK’s dominant services sector bringing forward preparations and stockpiling for what was anticipated to be a 31 October exit from the European Union.
Gold and silver don’t offer much of an opportunity either, with gold prices up by 20% in 2019, achieving its highest level since 2013 and silver by even more. Whilst growth may seem significant their underlying carry cost means a negative yield.
Might commercial real estate offer a solution to investors? It is one of the biggest asset classes in the UK and is estimated at more than £900bn.
Since the Global Financial Crisis, we have seen a dramatic shift in the investment strategy of defined benefit pension funds in the UK, with a big switch out of equities into bonds as their members have got closer to retirement and they have sought income rather than growth.
It is surprising that during this time allocations to real estate haven’t grown, with 44% of those polled by the Investment Property Forum citing illiquidity as a reason.
At the same time, there are now $1tn of assets under management in the private equity real estate world, so it could be argued that institutional investors are missing out.
The property sector offers the opportunity for healthy returns with strong and stable dividend yield growth and has been attracting institutional investors for years.
With accelerating investment flows into the alternative property sectors such as healthcare and self-storage, now is a good time for the generalist investor to consider their options without having to buy office or vulnerable retail properties.
Commercial real estate yields are considerably higher than corporate bonds. For example, supermarket corporate bonds maturing in December 2029 are yielding just 2.5% compared with 6% plus back in 2015. Currently, supermarket property yields compared to corporate bonds are now more than double.
But the biggest challenge remains how the general investor can access this opaque market. It has been dominated by institutions, sovereign wealth and very high net worth investors making it difficult for the general investor to enter without incurring high management fees or investing in a portfolio providing mixed results and that can be inherently illiquid.
That is why we have created IPSX, which will be the first and only regulated exchange in the world dedicated entirely to single real estate assets or those that share commonality. The exchange will allow investors yearning for yield the opportunity to invest in the high-yielding benefits of real estate but avoiding the risks of investing in a listed property company or a gated fund.
The Financial Conduct Authority has approved IPSX and we are poised for lift-off in the coming months with our first IPO providing investors the opportunity of investing directly into operating companies that own these assets.
With interest rates and bond yields remaining low, we need new investment opportunities to match liabilities for the years ahead that are in a secure and regulated market. All the traditional investment asset classes have their merits, but a new stock exchange for real estate provides a healthy innovation for all investors.
With data going back to 1750 showing that the UK interest rate equilibrium is around 3% we believe there will continue to be a positive yield gap between real estate and bonds for decades to come.
David Delaney is group chief executive of IPSX.