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The search for yield

The annual inflation rate in the UK jumped to 3% in August 2021, the highest since March 2012, with the Office of National Statistics predicting it to hit 4% by the end of the quarter. As we re-emerge blinking into the sun in a post pandemic world which has suffered sustained economic and wider market volatility, we ask the question: where should the UK investor turn in their search for yield?

One of the core principles of investment strategy, which is drummed into us from a young age, is that high yield equals high risk. Yield is relative, it transcends markets and sectors and is understood globally as a like-for-like measure of the risk / return equation. It is at the heart of understanding the measure of investment returns.

With 10-year and 30-year UK government bonds (“gilts”) offering 1.01% and 1.38% respectively at the time of writing and the current dividend yield on the FTSE 100 index at around 3.51%, should investors who normally shy away from the perceived “high risk” of the property market look to the long term income returns that can be achieved in UK real estate, and in particular the living sector?

Perhaps surprisingly, long-income UK commercial real estate can offer attractive yields when compared with more traditional low risk alternatives like gilts, without necessarily heightening the risk curve exponentially, whilst also outperforming the expected dividend yield from FTSE 100 investments of a similar risk profile. The living sector in particular can offer some surprisingly stable long term returns and with the added benefit of capital growth.

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Long-income UK commercial real estate can offer attractive yields when compared with more traditional low risk alternatives.

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. © Shoosmiths LLP 2022.

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