Buying a property and renting it out to tenants – known as buy-to-let - was the favoured way of making money out of property for many years.
As a form of investment, it’s as old as property itself and the private landlord has always been around, but it really caught the popular imagination in the 1980s and 1990s. It was driven by a greater spread of disposable wealth, rising property values and low interest rates. This meant not only that somebody with enough capital could buy a property and rent it out, but somebody without the same cash resource could acquire a property with a buy-to-let mortgage and make a profit. It seemed an unbeatable investment proposition – and for a while it was.
Rental income higher than the financing cost provided a regular income while rising property prices also gave the investor a healthy capital gain. Those same rising house prices also ensured a buoyant demand for rented accommodation from those who couldn’t afford to buy.
It’s hardly surprising that thousands of apartments in new inner city developments were snapped up 'off-plan' by buy-to-let landlords before they had been completed. As the boom was coming to an end, a year ago, the FT calculated that one in 30 adult Britons was a landlord, that the rental income from buy-to-let properties, which the FT estimated at between £55bn and £65bn a year, was the equivalent to about 3% of national GDP.
These were the kind of figures that started alarm bells ringing in government. It was felt that buy-to-let had become just too big, was distorting the market and helping to drive house purchase beyond the reach of young people. The Chancellor introduced an additional 3% Stamp Duty charge for second homes, making investment properties more expensive to acquire. He also reined in some of the tax reliefs available to property investors, and introduced new underwriting rules to make it harder for investors to raise the funds to finance property acquisition.
This worked. A Residential Landlords Association survey in 2016 questioned 2,883 landlords and found that no fewer than 58% were considering reducing investment in their property portfolios as a result of these changes and Savills found that mortgaged buy-to-let market purchases have fallen by 43%.
Buy-to-let was practically synonymous with the property market for so long that people might be forgiven for thinking that the end of the one market means the end of the other. This is far from being the truth. The wider property market was strong prior to the buy-to-let boom and is likely to continue to be strong into the foreseeable future.
After cash, property is still the main asset class. House prices in the UK have been rising for several generations and this is likely to continue. Between 2001 and 2017 house prices in England and Wales rose by more than 158%.
It is a matter of intense political and economic concern that the UK is in the throes of a housing crisis, with a shortage of houses and young people being priced out of the market. Experts believe that the UK needs to build 300,000 new homes every year, but only 178,000 were completed in 2016/17. This failure of supply to keep pace with demand means that house prices will start rising again, as soon as some resolution to Brexit.
In its autumn 2018 Residential Property Forecasts, property expert Savills predicts a total house price growth of 14.8% at a national level over the next five years, rising to between 17.6% and 20% in the North of England.
It’s hardly surprising then, that property is still one of the most popular assets in which people chose to invest. According to the Wealth and Assets survey by the Office for National Statistics (ONS), just about half (49%) of non-retired UK adults chose property as the best investment, making it consistently the most popular investment option since 2010. The proportion of people who still put property as the top investment has grown by 9% from 40% back in 2010-2012.
However, the question for them, now that buy-to-let is in decline, is: how to share in the benefits of the housing market?
A glib answer is to buy some land, build a house on it and sell it. But that, of course, calls for considerable capital – or access to capital – and it demands a great deal of experience and expertise. Capital is likely to be tied up for some time and there are many risks attached. This is not a practical option for the average investor.
More modestly, you could acquire a property in need of refurbishment, have some work done on it and then sell it on at a profit. Again, however, it needs significant capital and knowledge. Success depends on the difference between the resale value of the property and the purchase price, exceeding the costs of improvement and, unless a shrewd purchase was made in the first place, it’s all too easy to get this wrong.
Some form of indirect investment is safer. This could be as simple as investing in shares in a publicly listed builder or by investing in a fund that goes on to invest in the market for you.
Most of the UK’s largest property companies have converted to Real Estate Investment Trusts (REITs), such as British Land and Land Securities. A REIT is a property investment company whose shares can be bought and sold on the stock exchange. REITs don’t pay corporation or capital gains tax on their property investments.
Buying shares in building companies or REITs is a relatively safe way to invest in residential property, but it’s unlikely to generate the kinds of return that can come from a more direct involvement in the market.
This kind of involvement has now been facilitated by the development of online platforms which allow large numbers of investors to invest together through crowdfunding. Investors seeking a decent return on their cash can come together with developers and builders looking for funding.
A refinement of crowdfunding is co-investment where you can invest alongside professional investors and builders and developers. These platforms are now being used to fund property developments through a Joint Venture Agreement (JVA), a temporary but formal partnership of builders, finance houses and developers. A Special Purpose Vehicle (SPV) is created under the JVA, as a limited company in which the investors buy shares. The money they invest can only be used on a specific development.
If the houses sell for more than forecast, then the return will be higher, as the cash returned to an investor as a percentage of the profit achieved is the same as the proportion of equity they hold. Potential losses are limited to the amount invested.
The investor has the reassurance of investing alongside experts and the security of having an asset-backed investment. The time frames for a return are typically 18 months to two years and as little as £1,000 can be invested in a single project, allowing a spread of capital among a number of developments to mitigate risk.
A further advantage of a JV property investment is that it gives the investor an involvement in the project. They can invest in local developments, providing an economic and jobs boost in areas they care about by supporting local builders. They can visit the development they are funding and see its impact.
Buy-to-let may be on the way out, but JV property investing provides a way into the market that’s simpler, entails less risk, but still holds out the prospect of decent returns.