Is investing in property still the safest bet?

While the nature of the detailed fall­out from the EU ref­er­en­dum remains to be seen, the UK hous­ing mar­ket appears to be on firm foun­da­tions. For investors seek­ing any kind of sus­tain­able yield, the adage “safe as hous­es” cer­tain­ly seems to stand com­pared with many oth­er asset class­es.

Or does it?

Accord­ing to the Coun­cil of Mort­gage Lenders (CML), a weak­en­ing in sup­ply of hous­ing stock looks set to con­tin­ue, both with exist­ing and new builds. Fore­casts remain sub­dued, even pes­simistic com­pared with this time last year, not only due to Brex­it but also because of major changes to the reg­u­la­to­ry land­scape.

Last year’s 3 per cent increase in the stamp duty land tax (SDLT) thresh­old for sec­ond and sub­se­quent prop­er­ties, effec­tive from April 2016, was designed to help fund the country’s afford­able hous­ing bud­get, sup­port first-time buy­ers and boost home own­er­ship. But not every­one sees it like that.

With many still reel­ing from last year’s stamp duty increase, land­lords now have to con­tend with Sec­tion 24, the so-called Ten­ant Tax being phased in from April. Land­lords will have to pay an addi­tion­al 20 per cent of their annu­al mort­gage inter­est to HM Rev­enue & Cus­toms. As such, the CML expects buy-to-let (BTL) house pur­chase activ­i­ty to decline for at least the next two years.

Vanes­sa War­wick, who runs Prop­er­ty Tribes, a net­work­ing forum designed to give a voice to the two mil­lion or so land­lords based in the UK, points out that many of these sole-trad­er prop­er­ty own­ers don’t think of them­selves as land­lords sub­ject to leg­is­la­tion, nev­er mind hav­ing to keep up to date with its ever-chang­ing sta­tus. Yet these are pre­cise­ly the peo­ple who will be worst hit by the changes com­ing in.

“Those are the peo­ple being tar­get­ed by the new anti-land­lord leg­is­la­tion and we’re see­ing peo­ple leav­ing the sec­tor in droves, sell­ing up because they can’t afford to keep their prop­er­ties going,” she says. “But where are all those ten­ants going to go?

“What peo­ple fail to realise is that, with­out the pri­vate rental sec­tor, a sig­nif­i­cant pro­por­tion of the nation wouldn’t have any­where to live because the gov­ern­ment has failed to pro­vide enough afford­able hous­ing. The hous­ing cri­sis would be much worse than it is cur­rent­ly.”

The wider UK rental mar­ket looks rel­a­tive­ly pos­i­tive with mod­est rental growth expect­ed

Dev Malle, group dis­tri­b­u­tion direc­tor at My Home Move, the UK’s largest firm of con­veyancers, has seen the lev­el of BTL activ­i­ty halve in the past year as a pro­por­tion of total res­i­den­tial prop­er­ty trans­ac­tions, from near­ly 18 per cent to just 9 per cent.

While he recog­nis­es the mar­ket has been hit by tax treat­ment, he sug­gests it might have been more a case of caus­ing a bot­tle­neck as many tried to squeeze under the door before the hike took effect.

Not­ing the impact of the rise in stamp duty, Ms War­wick is adamant Sec­tion 24 is a much big­ger deal, cer­tain­ly for those who aren’t for­tu­nate enough to be cash buy­ers.

“The high­ly lever­aged sole-trad­er land­lord will be most affect­ed. They are look­ing par­tic­u­lar­ly vul­ner­a­ble right now, espe­cial­ly those who will be pushed into a high­er tax brack­et. They might be forced to put their rents up and then they might strug­gle to rent out the prop­er­ty,” she says.

Estate agents Knight Frank saw a mixed bag of out­comes last year. Ten­ant demand was strong in cen­tral Lon­don, but it was off­set by an equal­ly strong sup­ply of rental prop­er­ties. Liam Bai­ley, glob­al head of research, says: “In our view there is a risk of fur­ther rental falls in 2017, but not on the scale of the adjust­ments seen in 2016. The wider UK rental mar­ket looks rel­a­tive­ly pos­i­tive with mod­est rental growth expect­ed. Rents could rise fur­ther if land­lords begin to sell prop­er­ties in an effort to off­set the impact of tax ris­es.”

In terms of price expec­ta­tions, with a 7 per cent decline in west-cen­tral Lon­don, Mr Bai­ley says he is close to call­ing the bot­tom, per­haps with some fur­ther falls to come in prime out­er Lon­don through­out the year.

While agency fees, insur­ance con­sid­er­a­tions, void peri­ods and main­te­nance will all eat into returns, Jamie Sum­mers, head of real estate invest­ment at invest­ment man­ag­er at Smith & Williamson, says the key con­sid­er­a­tion for those look­ing at the asset class is liq­uid­i­ty.

Although res­i­den­tial prop­er­ty has his­tor­i­cal­ly been trick­i­er to access through tra­di­tion­al invest­ment vehi­cles, he says the pri­vate rental sec­tor is open­ing up, with build to rent a bur­geon­ing area of the mar­ket, led by hous­ing devel­op­ers. “We pre­fer invest­ments to be specif­i­cal­ly tai­lored to the asset class and its liq­uid­i­ty con­sid­er­a­tion, such as real estate invest­ment trusts,” he says.

The benefits of crowdfunding

One way to com­bat the liq­uid­i­ty con­cerns of hav­ing to find a buy­er would be to pool your resources and con­sid­er crowd­fund­ing. Accord­ing to inno­va­tion char­i­ty Nes­ta, 1.09 mil­lion peo­ple invest­ed in 2015, donat­ed or lent via an online alter­na­tive finance plat­form, and prop­er­ty is the sin­gle most pop­u­lar sec­tor, with com­bined debt and equi­ty-based fund­ing totalling almost £700 mil­lion.

Fraz­er Fearn­head, who runs prop­er­ty crowd­fund­ing plat­form The House Crowd, says for those not will­ing or able to take on the full bur­den of man­ag­ing a rental prop­er­ty, crowd­fund­ing opens the door in a more ten­ta­tive man­ner.

With promised annu­al returns of 9 to 12 per cent, he says often the biggest hur­dle to over­come is people’s scep­ti­cism.  The vehi­cle diver­si­fies your risk by not hav­ing all your eggs in the one mort­gage-shaped bas­ket, alle­vi­ates the pres­sure of fac­ing ris­ing inter­est rates or hav­ing to meet month­ly mort­gage pay­ments, which in turn means void peri­ods are less of a con­cern – all for as lit­tle as £1,000.

While hous­es in the UK can take on aver­age three months to sell, Mr Fearn­head dis­miss­es con­cerns over investors being “trapped” by the crowd­fund­ing route. “Peo­ple need to under­stand that prop­er­ty is an illiq­uid asset. But it is also very sta­ble, so we like to think of this as a hap­py medi­um. We can help peo­ple sell their shares and, while we can’t guar­an­tee it, most are sold with­in a few days,” he says.

Fans of the sec­tor, notwith­stand­ing its rel­a­tive infan­cy, write a long list of advan­tages. As well as the high pro­ject­ed returns avail­able to investors, com­pared with more tra­di­tion­al asset class­es, there is the social impact of ben­e­fit­ing the broad­er mar­ket as these plat­forms pool resources to fund new devel­op­ments and regen­er­a­tion projects.

But per­haps the pri­ma­ry ben­e­fits of crowd­fund­ing revolve around diver­si­fi­ca­tion. By open­ing up the asset class to new types of investors, through allow­ing low­er min­i­mum invest­ments, they have the oppor­tu­ni­ty to diver­si­fy their risk, extend­ing their port­fo­lios by type of prop­er­ty, loca­tion and length of hori­zon, rather than shoul­der­ing an indi­vid­ual BTL prop­er­ty and all the red tape it comes wrapped up in.

Still, Mr Malle remains uncon­vinced. He says: “It sounds great in prin­ci­ple. But from a con­sumer per­spec­tive, if I had my own buy to let, I would pre­fer to be in con­trol of when it is rent­ed and what I charge, rather than rely­ing on a third par­ty.”

The benefits of crowdfunding