Despite the potential risks of Brexit, UK property prices continue to rise. According to the Halifax House Price Index, they have increased by 3.7% in the last year. This highlights the imbalance between demand and supply, with house prices continuing to rise even though they have become increasingly unaffordable for first-time buyers in recent years.
As a result, many investors may be tempted to go ahead with a buy-to-let investment. After all, interest rates are low and house prices have a long track record of growth. However, doing so may not be the best move for long-term investors at the present time. Investing in the FTSE 250 could offer lower risk, as well as higher potential rewards.
Reward potential
In terms of the rewards that the FTSE 250 could offer, its track record suggests that it could deliver impressive capital growth in future. In the last 20 years, its total return per year has been around 10.5%. This is exceptionally high, and means that an investment of £1,000 in 1998 would now be worth around £4,668.
With FTSE 250 companies generating around 50% of their income in the UK, the index provides investors with significant exposure to the UK economy. At a time when confidence in the country is relatively low due to Brexit, this could mean that there are a number of stocks that offer wide margins of safety. For example, retailers are experiencing a difficult period due to weak consumer confidence, while the banking sector also faces an uncertain period. Therefore, investors who are looking for assets trading well below their intrinsic values may find such opportunities in the mid-cap index.
Risks
Buy-to-lets are a relatively risky investment. There is a lack of diversity, with all income and all capital growth coming from one asset. Even if an individual has more than one buy-to-let, it is still much easier to diversify via the FTSE 250. With a range of sectors and stocks, a portfolio of 20-30 shares can be built even with relatively limited funds. This could reduce the risks faced by an investor, with most companies likely to pay dividends over the medium term. In contrast, a struggling UK economy could mean that rent payments are delayed or missed for buy-to-let investors.
With 50% of the FTSE 250’s exposure being international, it provides diversification from a geographical perspective. As mentioned, Brexit could have a negative impact on the UK economy in the short run, so having stocks within a portfolio which operate internationally may be a sound move. That’s especially the case since countries such as China and India, as well as the US, continue to offer high growth potential over the medium term.
Takeaway
While investing in a buy-to-let may sound relatively easy due to past house price returns, the lack of diversity and the high reward potential of the FTSE 250 means that the mid-cap index may offer a more enticing investment opportunity. With an excellent track record, the index seems to be a sound place to invest for the long term.