Is property a good investment?
It’s well known that investing in property as part of a balanced investment portfolio can have several benefits:
In absolute terms, property has provided a total return of around 10.9% p.a. since the 1970’s, demonstrating that returns from real estate have proved to be a sustainable, long-term feature for property investors.
Property by nature has an intrinsic value, which makes it unique as an investment opportunity.
Risk and reward:
The overall risk and reward characteristics of property mean that it can be held at any time of the economic cycle, providing the opportunity to produce both income and capital growth when the economy is growing, yet also capable as a strategy to preserve wealth when there is uncertainty and weakness in the market.
Property prices are not correlated to the stock market, with UK property values remaining resilient during periods of economic downturns.
A brief history
For much of the last 20 years, you could buy just about any property and watch it shoot up in value. The market has withstood a continuing volatility in the financial and economic markets over recent decades, which is evidence of its resilience as an asset class.
The UK property market is a different animal to what it was 10 years ago. It’s more geographically diverse, the private rented sector is increasing in popularity and homebuying is taking a back seat. The market in London is declining, with regional cities becoming more attractive for yield-hungry investors.
Geographic hot spots
The Midlands Engine and The Northern Powerhouse have come into their own over recent years. Regional cities now have the business conditions to draw companies, tenants and investors away from a pricey London market. As serious inwards investment and infrastructure projects take shape, locations such as Birmingham, Liverpool and Manchester are able to achieve higher rental yields, compared to the capital.
Although London retains its place as a worldwide hotspot, property prices are declining for the first time since 2009, falling 0.7 per cent in the year to June, according to the Office for National Statistics. Transaction levels in the capital are down 20 per cent year on year and the number of homes being placed on the market for £2m or more was down 25 per cent in the third quarter of 2018 compared with a year before (according to property data company LonRes). In addition, the capital is more exposed than the national market to stamp duty changes and is impacted by additional taxes for international investors. Time will tell if this is just a blip or a longer-term trend.
UK property market forecast
Times have changed for property investment, and the rules aren’t as clear as they once were. Rob Dix from Property Geek explains;
“Make no mistake, times are tougher for property investors now than they have been for 20 years. The heady days are gone – the dinner party landlord is being killed off by additional stamp duty, a brutal tax regime and a baffling amount of new legislation.”
UK Home ownership rates fallen 10%
According to Bloomberg, after the financial crisis, homeownership rates fell in a large number of European Union nations, but none as dramatically as in Britain. By 2016, ownership rates in the EU had dropped about 4 percentage points from their peak to 69.2 percent, compared with a near 10 point decline in the U.K to 63.4 percent. As a result, the U.K. has fallen in the league table of homeownership: only Denmark, Austria and Germany have fewer owner occupiers.
Buy-to-let down 22%
According to the latest Mortgage Trends Update from UK Finance, the value of new buy-to-let property purchase mortgages completed up to the end of September 2018, is down by 22.2% year-on-year. Tax and mortgage regulations and the increase in stamp duty mean that direct property investing is harder than it once was. The financial responsibility doesn’t stop with purchasing property. The costs involved in maintaining a property portfolio are also increasing, with the expense of hiring a lettings agent or property manager, the cost of property maintenance, dealing with blocked drains or a broken boiler. Then there’s the cost of losing income when the property is empty.
Alternative ways to invest in property
There are still plenty of opportunities in property to deliver a favourable performance for investors in the medium term to long term, but only for those who are willing to take a professional approach, do their research and develop a long-term strategy. Some people are willing to do that, and they could do very well over the medium- to-long-term. But plenty of others still want exposure to property because of its stability and strong track record, yet t direct property ownership just doesn’t work for them. The positive news is that there is a way to invest in property without actually being responsible for it.
If you buy real estate on your own, you may lock up all your money in one building. A portfolio of property investments can help smooth the performance of a balanced investment portfolio, in the same way your overall investment portfolio should be diversified.
There are a few alternative ways to invest in property whereby you own a share of many different properties, rather than having all your eggs in one basket.
Property investment trusts:
Buying a share in a portfolio of real estate assets is similar to investing in a managed fund. Money pooled from investors allows the trust to purchase more buildings than an individual would be able to buy alone. With this option you may avoid the upfront or ongoing costs that come with owning property directly. A property investment trust gives you a piece of many different properties; that way, one underperforming building won’t ruin your portfolio.
Capital is at risk and investors don’t have control over the assets held in the trust. You can typically liquidate your investment to cash, however there may be costs or fees involved, as well as timing considerations.
Property backed lending provides an opportunity to earn a passive income from property, with attractive risk-adjusted returns. Direct Lending operators invest your capital by lending it out to property developers who have proven success and conservative loan-to-value on their properties (LTVs). LTV is used to compare the difference between the value of the property and the amount of money being borrowed against it. The higher the ratio of the loan-to-value, the more risky it is for the lender.
Diversifying your investment across a wide range of loans can help protect the downside, by spreading the risk your investment will have a better chance of riding the waves of any changes in the economic cycle. As these loans are all secured against a number of properties in various locations this mitigates the impact of one borrower defaulting. You can also choose to access your cash or keep it invested for a long period of time. However, the longer you keep your cash invested, the better the return.
Understanding the risks:
As with any investments, conduct careful due diligence and consider opportunities which operate in niche, higher-margin markets where demand is strong, where the investment may be less vulnerable to any potential downturn. Look for conservative loan-to-value ratios with good geographic spread with a focus on the regional hotspots, where there is growth potential.
The 3 D’s of Direct Lending
Due diligence: review platforms and investment product providers in detail. Understand their experience, expertise and alignment to your interests.
Downside protection: your upside is capped in lending – the best you can do is get your interest and capital back – review what could negatively impact the borrower, and lead to a loss in the event of default.
Diversification: you should have a minimum of 50 loan positions (with no more than 2% of funds in a single opportunity). Ideally you will have 200+ in your lending portfolio
The UK political and economic climate is expected to remain uncertain over the course of the next couple of years, with Brexit impacting the short-term horizon; but there is an established case that the property market can preserve wealth over the medium-to-long term.
The inherent features of investing in property, such as the scope for diversification, lower volatility and the potential to earn a stable income return, mean that on balance, property can make a compelling investment in the context of current market conditions. Property, and its performance as an investment, should be assessed in the context of other options available and in conjunction with your financial objectives, risk profile and capacity for loss.
For investors who are willing to take a long-term view and explore new opportunities, the next 5 years could provide some compelling returns.
How BondMason can help
BondMason has achieved a stable and steady investment track record since 2015, from a conservative loan portfolio - with an average LTV of 56% - secured against UK property. The BondMason Investment team reviews every loan, with 1-in-4 loans being approved based on our strict assessment criteria. We conduct additional due diligence and verify valuations with our own analysis, research and marketability assessments. In short, we roll up our sleeves and do the leg work to ensure the decisions we make are based on our own insight, backed by years of experience.
Nothing in this article should be construed as advice. Your capital is at risk.