Email of the day on the merits of buy-to-let
Comment of the Day

November 02 2018

Commentary by Eoin Treacy

Email of the day on the merits of buy-to-let

Regarding your piece yesterday on balancing one's portfolio and finding safety, I would add a somewhat personal view. As I am in the finance industry myself, the restrictions on investing in listed securities is quite a burden and I'm finding traditional buy-to-let investing more and more compelling. It should work reasonably well also as an inflation hedge, since the rent can be adjusted with inflation and the real value of the principal generally moves with inflation. Of course this equation depends on things like whether your area has population growth and the yield curve of your respective currency, but at least in EUR the FIXED financing costs are so ridiculously low that it is hard to see how one can lose money on a say 60-70 percent financing over a 15-20 year horizon. A practical issue is that there is a (modest) amount of work when finding a new tenant, for example. For me, this also provides a nice additional retirement income, since the tenants have paid off the bank loans roughly at the same time as I'm about to leave the workforce, so that the rents become cash flow to me. Just a personal thought here, it may not be the best choice for everyone.

Eoin Treacy's view

Thank you for this informative email and I agree that the potential for raising rents is an attractive inflation hedge, not least because property prices, as fixed assets, tend to rise with the inflation rate. However, it is also worth considering that property prices have been boosted by quantitative easing and the ridiculously low funding levels that you speak of have been available to everyone for a decade already. The key, as you mention, fixing financing costs, low leverage and attractive capitation rates.

This report from KKR focusing on the merits of private equity investing may also be of interest. Here is a section:

Given lower expected returns, how does one think about a portfolio optimization process that leverages many of KKR’s top-down investment themes? Because of our forecast for lower returns, we think that portfolio optimization becomes even more important in the new environment we are envisioning for macro players and global asset allocators. Importantly, beyond a more thoughtful approach to asset allocation, we also believe that investing behind long-tailed investment themes that leverage both periodic dislocations as well as secular growth drivers will become an increasing source of alpha for CIOs who run multi-asset class portfolios that extend across regions. To this end, we detail below four long duration, macro-oriented investment themes that we believe can help investors generate significant outperformance during the next 5- to 10-years. Importantly, while each theme is different, there is a common thread amongst all of them: Buy Complexity and Sell Simplicity.


How should we think about the illiquidity premium in Credit and Equity? What are the key drivers and is it still attractive in absolute and relative terms? See below for full details, but we identify several commonly watched macro factors that can help investors to better explain what drives the illiquidity premium across both Credit and Equity during different periods in the cycle. At the moment, our work shows that the illiquidity premium is appropriately priced (i.e., an investor is not overpaying for the return per unit of illiquidity). Interestingly, despite more capital coming into the alternatives arena, our research shows that illiquidity premiums have — thus far — remained fairly constant in recent years. However, as we detail below, there are parts of the alternatives market where we do have our concerns, including the lower end of the Direct Lending business. Our bigger picture conclusion, though, may be more important: given where absolute rates and relative credit spreads are trading in the liquid markets, the pick-up in return if a manager of illiquid assets can perform is as high as it has been since just after the GFC.

The point here is that property and private equity have an illiquidity question but solve for the strength of cashflows. Equities do not have a liquidity issue but their cashflows do tend to be more volatile. However, the broad commonality of both strategies is the same. In an inflationary environment there are clear merits to owning parts of real-world businesses that have solid cashflows and a reliable history of dividend increases. That is certainly preferable to relying on paper issued by governments with little visibility on the value of the currency cashflows will eventually be paid in.

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