Bricks and mortar have long been seen as a prudent way to invest with the phrase ‘an Englishman’s home is his castle’ revealing just how deeply entrenched in the British psyche property is.
That’s been for good reason: property is one investment that nearly everyone has an ambition to make at some point in their lives just by buying their home.
But over the past 20 years or so, the popularity of buy-to-let as a way to get additional exposure to the property market has grown substantially.
Those who got in early have reaped the return. A report written in 2015 by economist Rob Thomas showed that buy-to-let returns over the previous 18 years had beaten those from every other major asset class available.
Since buy-to-let mortgages were introduced in 1996, Thomas calculated that net annual returns have averaged at 16.2 per cent, compared to a lower average return of 6.2 per cent on UK equities.
While that can in large part be put down to the meteoric rise in house prices over the same period, it does demonstrate why buy-to-let became so popular.
But swingeing tax and regulatory changes over the past few years, coupled with high property prices, have resulted in a lot of negative headlines for buy-to-let.
Tales of landlords selling up and abandoning the sector as well as bemoaning how much harder it has become to get a mortgage have become increasingly frequent.
It’s perhaps understandable that investors and those thinking about investing in property are asking questions.
Here, we take a look at the fundamentals in the property market and find out whether and where it’s still possible to make a profit.
Residential property is a cyclical market – like anything, it has ups and downs in the short-term. Uncertainty around Brexit has prompted many buyers and sellers to sit on their hands, choosing a wait and see approach to moving house.
As a result, the number of homes changing hands is a bit subdued at the moment and it’s putting some pressure on house price growth. However, the uncertainty in the housing market is being largely driven by depressed confidence.
It’s unlikely that will last forever.
Most of the experts point to longer-term trends that underpin the future performance of residential property investment.
The UK’s population is growing, our building rate – while improving – is not keeping up with demand, and the number of people per household is falling due to a rise in divorce and fewer families choosing to live intergenerationally.
In short, there are too few homes for our existing population and that’s a situation that’s likely to endure for the medium to longer term.
That means, investors who have exposure to property as an asset are highly likely to be able to generate a return from it – demand outweighs supply.
Investing in buy-to-let particularly is also about both capital and income.
Rental growth is strong at the moment and so long as landlords are prepared to keep their money invested for the longer term (a minimum of five years) then short-term fluctuations in house prices are really neither here nor there.
This is why there’s an abundance of evidence that investors are still keen on British property.
Political and economic uncertainty appear to have done little to dent investor confidence – particularly overseas investors.
A piece of research from Knight Frank recently found that the UK had reclaimed its position as Europe’s leading commercial property investment market in 2018.
Over the course of the year the UK overtook Germany to become the favourite destination for property investors.
The property market isn’t just one number, which can often be the impression left by average house price reports. There is enormous variation across regions, and the UK’s constituent countries.
Scotland and the North West of England are doing very well compared to the South East, for example.
Even within London, where prices have been widely reported as under pressure, prime property hugely distorts the numbers. Ordinary family homes and rental flats have stood up against a fall in value much more effectively than £30million villas in Kensington & Chelsea.
Savvy investors looking at the bigger picture can still find the right areas to invest.
The Office for National Statistics data shows the seasonally adjusted official house price index fell by 0.2 per cent between December 2018 and January 2019. Year-over-year growth remains positive though it slowed to 1.7 per cent, from 2.2 per cent in December.
This is an average, in some areas they’re down and some up.
For example, prices in January for completed sales in London fell 1.6 per cent year-over-year, and were essentially flat in the surrounding South East, South West and East regions.
Prices in the West Midlands, East Midlands and Wales still are rising at a 4 per cent to 5 per cent year-over-year rate, though month-to-month gains have slowed recently.
This shows just how important it is to understand where you’re investing to protect your capital as far as possible.
Traditionally, the only way for these investors to gain exposure to the residential property market was through buy-to-let.
Having a house you could rent out provided good returns in rental income, but also allowed landlords to benefit through capital gains.
But for many private investors, buy-to-let no longer stacks up financially thanks to sweeping tax reforms.
Landlords can no longer offset their mortgage interest costs against rental income for tax purposes. Instead they are now seeing this relief phased out and will eventually be left with a 20 per cent tax credit by 2020.
This has significantly eaten into the returns of many landlords with mortgages, especially where they have a smaller deposit.
This, along with a stamp duty surcharge of 3 per cent on new purchases introduced three years ago, means buy-to-let is increasingly expensive to get into and can be less profitable.
Owning and running your own property can be rewarding, but it can also be a practical and time-consuming headache.
Luckily for would-be property investors there are other ways to gain exposure to residential property without buying the bricks and mortar directly.
Property crowdfunding, peer-to-peer lending, and investing in the right funds can give investors a stake in the property market without the hassle of buying, running, and selling property.
Going down these routes allows you to earn returns either from an equity stake in a property, or from others’ mortgage debt.
You don’t always have to invest solely in one property either; depending on the service, investors can opt to spread their investment over a range of properties, with a view to earning rental returns and benefiting from capital gains.
This allows you to spread your exposure and limit the risk of something going wrong with an individual property.
It’s a good idea to carry out due diligence on the company before investing any significant amount. In particular, it’s important to consider whether you want to invest in mortgage debt or equity.
Debt relies on borrowers being able to keep up with their repayments or the fire-sale of the property or ground used as security for the loan.
You should also look at whether your investment would benefit from being invested through a tax efficient wrapper such as a Sipp, stocks and shares Isa or innovative finance Isa.
There are risks involved with this type of investment, and it’s a good idea to talk to an independent financial adviser when making big financial decisions.
Source: This is Money