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Abu Dhabi, UAESaturday 23 June 2018

Real estate the best asset class of the moment but gold could be the next crypto

Peter Cooper assesses the five main options for investors in the current financial climate

San Francisco in the United States. A recent Gallup poll found that 34 per cent of Americans consider real estate the best wealth-creating vehicle. David Paul Morris/Bloomberg
San Francisco in the United States. A recent Gallup poll found that 34 per cent of Americans consider real estate the best wealth-creating vehicle. David Paul Morris/Bloomberg

Investors looking to build up their wealth have five major options available to them today, one of which is now widely considered a Ponzi scheme in financial circles despite undoubtedly making some wealthy on the way up.

We are talking about stocks, bonds, real estate, precious metals and cryptocurrencies.

Interestingly, in a recent Gallup poll, 34 per cent of Americans considered real estate as the best wealth-creating vehicle; tellingly, in the home of Wall Street, stocks only scored 26 per cent.

Gold and bonds scored 17 and 16 per cent respectively; Bitcoin was not included in the survey, though anecdotal evidence suggests it is still very popular with the younger demographic.

My last column considered why the world’s most successful investor, Warren Buffett, considers Bitcoin and the cryptocurrencies to be ‘rat poison’.

I won’t dwell on this Ponzi scheme phenomenon again, except to point out that this bubble burst last December and since then has been an epic destroyer of capital.

It works on the ‘greater fool’ theory of investors. Thus it now has to attract another even larger number of fools to buy it than last December for its price to spike again. How likely is that?

But if Bitcoin shows investors anything, it is that being an early investor in the next major speculation can be highly profitable so long as your luck lasts.

Despite a massive crash Bitcoin is still up more than 300 per cent in the past 12 months, by comparison to around 5 per cent for gold, minus 2 per cent for bonds, nothing much on stocks and about 6 per cent for US residential real estate.

US property looks a safe, if not exciting performer. If you add on around 4 per cent in rental yield then that’s a total gain of 10 per cent, which is very comfortable with US inflation running at around two per cent.

Of course real estate does have its bad times too. Remember the great recession a decade ago? House price falls then were big enough to leave those with large mortgages in negative equity, with homes worth less than the debt entailed on them.

However, for many people it is precisely the ability to borrow against a house purchase that makes it such a great investment.

Usually with shares you only invest what you have earned. Indeed it is not generally advised to do otherwise. But with a house you can gear-up your investment so that, if all goes well, you are immediately earning a return on a much higher initial investment amount.

It’s not rocket science. You invest more when you buy real estate, so the return is also higher (and the losses if house prices drop).

Also in many countries residential property markets are well established. You have an infrastructure of estate agents, lawyers and bankers to help and guide you.

But maintaining an independent mind is always advisable as you pay fees for all this assistance, and keeping those fees down is a key to maximising the return.

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That said expat investors face another set of choices. You do not automatically have to buy in the country of your birth. If you are a UAE resident you could buy here or, if you are more adventurous, in another country, say where you like to spend the summer perhaps.

It can be a complicated decision. But keep a clear eye on the total return-on-investment (rental yield plus house price inflation) and make a realistic forward projection.

For example, will the UK deliver the best total returns for investors over the next five years, or the UAE?

Many observers consider UK property to be over-valued and note its weak economy only grew by 0.1 per cent in the first quarter. They reckon the political chaos and uncertainty surrounding Brexit is so far not reflected in lower house price levels. Rental yields are also weak.

By comparison the UAE residential sector has prices down by say a quarter due to the recent oil price collapse. But oil prices are now in a recovery phase. The US abandoning the Iran nuclear deal is just the latest pointer to even higher oil prices in the near future.

As oil prices rise, so the amount of money in circulation in the UAE expands as trade and commerce will take off in this regional business hub. More expats will be needed. They have to live somewhere. So rents and house prices will rise because housing units cannot be built fast enough.

Changes to UAE residency rules for certain categories of expatriate announced on Sunday should also help stimulate demand for local real estate, though they still fall short of permanent residency.

Of course, you might do better elsewhere. In Eastern Europe property prices are low by comparison to Western Europe, and yet GDP and salary growth is very much higher.

Take Budapest. The Hungarian economy is growing by four per cent per annum, average salaries are up 15 per cent year-on-year, and Budapest house prices by 8 per cent. Rental prices have been slow to shift upwards. But hotel room rates are 30 to 40 per cent higher than two years ago. Rents should follow.

Expat property investors ought to also think carefully about potential currency gains, even if these are very hard to predict. For instance, the dollar-linked dirham looks to be in a long-term decline against the euro, so that could deliver an addition bonus to investors in euro-linked Budapest.

Even after the dollar’s bounce back this year, that’s added about 10 per cent to returns on real estate in Budapest for dirham investors over the past two years. That could be enough to make Budapest a better bet for global property investors than the UAE, if this trend continues.

But what of other major investment classes this summer? Stocks have turned bearish after a very long rally. Bonds face further interest rate rises that will automatically depress their value.

That leaves precious metals. Could it be that the further demise of the cryptocurrency bubble drives speculative money back into this asset class, and that it delivers the best overall performance in 2018?

Not much sign of it yet. But with commodity prices like oil on the up, this would not be such a surprise.

Peter Cooper has been writing about finance in the Gulf for more than 20 years