Safe as Houses? Considerations in Property and Equity Investing

Property vs markets

Balancing investments between property and investment markets offers meaningful advantages. Investing in property means you own something physical, which can earn you rental income and increase in value over time. You can also borrow money to buy more property (a strategy known as leverage) but this comes with higher risks, which we explore in more detail below. On the downside, property investments often involve complex rules, expensive fees, and are harder to sell quickly if you need cash. On the other hand, buying a diversified portfolio of investments gives you access to the global economy and furthermore, shares are easy to buy and sell, so your money isn’t locked up. Investments can also be held in tax-efficient accounts, for example, ISAs or pensions that help you keep more of your profits.

For investors who already own a lot of UK property, adding shares from different countries can help balance the risk. Real Estate Investment Trusts (REITs) may also strike a useful balance, offering property exposure without the operational burden of direct ownership. Put simply, REITs are companies that own or finance income-generating real estate, and they allow investors to buy shares, similar to a regular stock, which gives them a slice of the property profits without having to manage buildings or tenants themselves. Because they typically pay out most of their earnings as dividends, REITs can be an efficient way to earn regular income while staying invested in the property market.

Understanding the risks

Real estate is often seen as a safer investment than stocks, mainly because its prices tend to move less dramatically. But that sense of security can be deceptive once borrowing, or leverage, is taken into account. Leverage magnifies both gains and losses. While the potential upside can be impressive, the downside can be painful. With real estate, if property prices fall and you've taken on mortgage debt, you could end up owing more than the property is worth – which is not a risk for investors with equity market exposure.

Leverage has helped plenty of investors build wealth through property, but it's also the reason some have incurred significant losses if they bought at an unfortunate time. Equities can be leveraged too, but this isn’t common practice or necessary for most retail investors. The key is understanding how debt interacts with property market movements, because that’s where substantial risk lies for investors.

The relationship between interest rates and property prices

One of the most important factors that has influenced property prices in recent history is the level of interest rates. Typically, when interest rates are high, borrowing money becomes more expensive, which tends to reduce demand for property and put downward pressure on prices. When rates are low, borrowing is cheaper, making it easier for people to buy homes and invest in property, which can drive prices up. To put this into perspective, in the UK during the early 1980s, short-term interest rates were 15-20%, making mortgages extremely costly. After the global financial crisis, record low interest rates for an extended period have helped fuel a long period of rising property values. This decline in rates, combined with more relaxed lending rules, contributed to significant gains in UK property prices over the past few decades.

Diversification through equity exposure

The chart below compares total returns from UK residential property with those from a diversified global equity index over a 10-year period.

As illustrated, global equities have delivered stronger performance than UK residential property. Dividends, which are regular payments some companies make to shareholders from their profits, have helped with this. When these are reinvested instead of cashed out, they allow investors to buy more shares, which in turn earn more dividends. This creates a snowball effect known as compounding, where gains build upon previous gains over time. While property offers stability and income, equities (despite short-term ups and downs) have rewarded investors with higher overall growth. Returns through property rental yield are an important component too. In recent years, however, regulatory changes have created headwinds, putting downward pressure on rental yields.

Considering the various advantages and limitations of both property and equity investments, it's clear that each plays a distinct role in a well-rounded investment portfolio. Ultimately, relying solely on UK residential property requires considerable skill (or luck) to generate returns consistently. A broader mix of investments carefully sized and aligned with your objectives, tends to produce more reliable outcomes over time, though of course there is no guarantee. There’s no universal formula, but a well-diversified, thoughtfully constructed portfolio is likely to be the strongest foundation for long-term financial resilience.