Equity valuations and income

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Has the world gone mad? A British take-away food company called Just Eat has just made its debut on the London Stock Exchange. It was valued at £1.5bn, which is over 100 times its last year’s underlying profit, and it went up 5% on its first day’s trading. We are not investment bankers, we are property specialists, so it is not for us to say that it was not worth that multiple. To a lay man though, it is hard to see how a take-away food company is worth 100 times its annual profit. Apparently, the company is being positioned by its promoters as a technology play, which allows everyone to get very excited and the valuation to go up. This is not an isolated case. More and more companies and their advisers are taking advantage of a broad connection with technology and favourable market conditions to raise huge sums based on ever increasing multiples. Does any of this sound familiar?

A number of people have expressed the view that a technology bubble is forming. If they are right, then when the bubble bursts (they all do eventually) there are going to be a lot of people suffering huge losses. Unfortunately, there is a very real danger that other sectors of the stock market will be dragged into the mire. Which does not mean that there are no sound equity investments out there. However, it does reinforce the need for a balanced portfolio so that investors are not over exposed to equities.

‘Income, income, income!’ is the dominant investment strategy for many astute investors. In times of over excitement in equity markets it is easy to see the attraction of a secure and attractive income stream from an alternative asset class. Sure, rising stock prices means paper gains and if you choose the right exit point (oh, how we all wish we could do that!) or adopt a long term hold strategy then there are sound profits to be made. However, putting hard cash in the bank every month is never a bad strategy and it appeals to most of us.

When you can get a net yield of 8% p.a. from a property, why would you not invest in that asset class? Of course, some people like immediate liquidity and yes, property is less liquid than equities. Importantly, though, there is always a buyer for the right property. If you are buying equites for the long term and the market drops are you going to sell or will you continue to hold? Most passive investors don’t panic and they decide to hold. For them, immediate liquidity is not required for all of their investment portfolio and property may be an ideal investment for them.

So where can you get an 8% p.a. net yield? UK student accommodation is the obvious answer. There is going to be a shortage of student accommodation for many years to come, which will result in a steady and attractive income stream for investors. If you believe that income is important or you want to re-balance your portfolio, this is a sector you should invest in.

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