Property: an area of interest with product innovation for UK investors in 2019
The world economy is suffering a slowdown from Beijing to Berlin, while the financial markets are bearish and volatile. Investors are faced with:
- Flat interest rates continuing: the market is not expecting interest rate rises in a meaningful way.
- A slowdown in consumer spending is leading equity markets into a downward trend as the bull run fades and volatility continues.
- A slowing property market, including a drop in top-end London prices reverberating downwards and outwards through the UK market.
So much economic uncertainty and global market correlation makes it challenging to find suitable investment opportunities. However, our research shows people still have great trust for investments backed by ‘bricks and mortar’ and property continues to be a popular asset class with investors and their advisers due to historical long-term growth (a return of 10.9% p.a. since the 1970s).
As property prices are not necessarily correlated to the stock market, UK property values can remain resilient during periods of economic downturn.
With the impact of tax changes on buy-to-rent continuing to affect smaller property investors, many previous ‘would-be’ landlords, as well as passive and more casual investors, are now looking to invest in property through funds and structured products.
The good news is that there is a growing range of innovative products and wrappers, allowing private investors to access unlisted and uncorrelated investment opportunities that once were the domain of institutional investors alone.
Listed funds and trusts
Investing in property for private investors has tended to mean purchasing property directly or investing in listed funds and trusts. These listed funds remain popular to gain exposure to property.
- Commercial property funds invest in commercial property, such as retail, office blocks and warehouses. Yields can be higher than those available from the residential market, but there are associated risks. Commercial property can stand empty for longer than residential, in between tenants.
- Residential property funds and trusts offer exposure to the UK residential market through flats and houses within the rental sector. With this option you can benefit from diversification as you’ll have a share of many different properties; that way, one underperforming building shouldn’t ruin your portfolio.
- Indirect property funds focus on the shares of firms within the property and property development sector, rather than physical bricks and mortar. In this case, their performance is linked more closely to the wider share market and the trading performance of these firms rather than the value of property and the income that it generates.
The types of properties within funds is an important consideration. For instance, we believe that offices and warehouses could generate good returns in 2019. High street properties are under pressure, so you may well want to avoid these. Similarly, with residential you may want to know the exposure to the top end of the market and central London as some areas have decreased in value – and this may reverberate into other regions in 2019.
With all these options, capital is at risk and investors don’t have control over the underlying assets held. Listed funds generally offer clear pricing and you can typically liquidate your investment to cash, however there may be costs or fees involved, as well as timing considerations. If a large number of investors attempt to cash in at the same time, this could force some property funds to suspend trading – or move to bid pricing - as in 2016 following the UK’s vote to leave the EU.
Correlated versus uncorrelated
Traditional listed funds typically follow the broader market movements regardless of the underlying asset values. Financial innovation is delivering more options for investors looking for alternatives, such as:
Unlisted funds were traditionally available for institutional investors only, but recent innovation of financial products and following MiFID II, the adviser market has been more receptive to these funds and more individual investors have been able to participate. As unlisted funds are not traded on an exchange, their price is not subject to daily price volatility, and they trade at a value closely linked to their net asset value (NAV).
Investments in unlisted funds are generally illiquid, and many have ‘lock-in’ periods. However, recent innovation has seen unlisted funds offer weekly trade points – an improvement from the traditional quarterly or semi-annual liquidity cycle.
The FCA has just closed its consulting phase on the rules governing funds that invest in assets with little underlying liquidity, reflecting the increasing demand for these products.
Crowd-funded Real Estate
Crowd-funded Real Estate Special Purpose Vehicles (SPVs) allow investors to select individual properties to invest in. Whilst the selection allows more control, the pipeline of investments is not guaranteed or necessarily suitable for the investor’s objectives, so it takes time to create a portfolio.
Pricing is linked to NAV, but such SPVs are not readily saleable securities. Where liquidation is possible, the proceeds can be lower than market value, and trading fees can be significant.
We expect growth in this area from many buy-to-let investors exiting their directly held portfolios and moving into structured and intermediated products.
Property-backed lending provides an opportunity to earn a passive income from property, with the potential for attractive risk-adjusted returns. Property loan investments range from buy-to-let through to wide ranging property development – such as building hundreds of homes on a greenfield site.
When choosing which property loans to invest in, investors should ensure they understand the nature and scope of the underlying project – for instance whether it needs planning permission. Keep an eye on the loan-to-value ratio and pay particular attention to the valuation – is it independent, conducted by a professional surveyor adhering to red-book processes, and does it stack up with local property sales.
What does the near future hold?
We expect to see an increase in choices available to enable homeowners to use their house to generate income and release capital.
There are many more homeowners using equity release mortgages to access capital – whether that is then used to invest in the home or elsewhere. The latest figures show that £4bn of capital was unlocked between October and December by equity release mortgage holders.
Innovation increasingly allows people to “sweat their home as an asset’”. Just ten years ago, it was inconceivable to most of us that large numbers of households would be making money by letting their spare rooms to tourists from around the world. There are now services to let your garage out as storage space, or driveway for parking.
We are beginning to see this mix of technology and financial innovation creating more investment opportunities for investors too, including new ways to invest money in illiquid assets; which may in turn lead to further opportunities for homeowners looking to access the capital tied up in their own property. Some advisers are already considering these increased investment choices, when designing model portfolios and looking to optimise risk-adjusted returns for their clients.
Stephen Findlay is chief executive of BondMason
Tim Prizeman / Kewalin Evans, Kelso Consulting (PR advisors to BondMason)
KevE@KelsoPR.com 020 7242 2286
Karen de Silva, Head of Brand Marketing, BondMason
Tel: +44 (0) 1582 802 000
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About the research
BondMason’s research was conducted in August 2018 by accredited market research agency DRG who interviewed a sample of 1,014 UK adults with at least £25,000 in money or investments (including, if they have them, a private pension fund and second property).
Capital is at risk. Nothing in this article shall be construed as advice. Please contact your Financial Adviser to determine if Direct Lending is a suitable allocation for your investment portfolio. Please see BondMason’s full disclaimer and terms for details.