When deciding on the best time to make any form of investment, no one can say for sure when that time is.
With the best time to invest in an asset class being at a point when its price is going to rise, only hindsight can tell us when that has been.
Now sure, we all know that over the long term house prices rise. The Department of Communities and Local Government records that the average UK house price in 1969 was £4,640. By 2007 this had risen to £223,405.
The key point for the investor is that house prices, like any other commodity, don’t rise in an even, straight line. They move by fits and starts, irregularly. If you buy a house, you can be reasonably confident that, in 30 years’ time, its price will have risen, and probably by a significant amount. However, you can’t be sure that its value will be considerably higher in a much shorter period of time (which itself is one of the reasons why so many investors invest for the medium-to-long term).
That’s the dilemma facing someone looking at investing in UK residential property at the moment. After years of growth, how do we know whether we are entering one of those periods when prices are poised for an upwards trajectory?
Researching the residential property market
Fortunately, there is some guidance available. The UK faces an acute housing shortage, having built only about half the required new homes over the past 10 years, and when demand exceeds supply in this way, rising prices will follow.
This is borne out by Savills’ latest report. The property expert has just released its autumn 2018 Residential Property Forecasts in which, as the title implies, it gives some guidance on the future likely trajectory of UK property prices.
For a start, the report takes aim at some of the more lurid reporting of the Bank of England’s extreme, “almost apocalyptic’’, scenario of 35% house price falls in the event of a hard Brexit and spiralling interest rates.
We believe this is highly unlikely. A correction of this nature is without precedent and the economic conditions required are at the margin of a wide range of potential outcomes…
In fact, Savills predicts a total house price growth of 14.8% at a national level over the next five years.
Within this national picture, there’s likely to be considerable regional variation, with prices in the North West and Yorkshire likely to grow by more than 20% by 2023 and, for the North East, Savills forecasts a 17.6% rise. The North/South divide will lessen fractionally as London can only anticipate a 4.5% price rise over the period.
Of the North as a whole, the report says:
With house prices in the North only recently returning to pre credit crunch levels, there is more capacity for both household finances and mortgage lenders to support more growth over the next five years than in other regions across the UK.
Smaller deposits required for first-time buyers and lower home-mover loan-to-income ratios compared with most of the rest of the UK are expected to underpin demand in the owner-occupier market. Meanwhile, the ability to achieve higher income yields in the northern cities should support investment demand from both institutional and private investors.
It therefore looks like property prices – certainly in the North - are set to rise. So how can an investor take advantage of this?
Changing routes away from buy-to-let
For many years buy-to-let would have been the preferred route: investing in a property and then renting it out. This made a lot of money for a lot of investors over a number of years, as not only did it bring a decent revenue which was greater than financing and other costs, but also a capital gain as the underlying asset – the house or flat – rose in value in line with general property prices.
Sadly, all good things must come to an end. The very popularity of buy-to-let combined with more people entering the market pushed house prices up even further. While this was good for the landlords, it wasn’t such good news for younger people who wanted to get on the housing ladder but couldn’t afford it, or for a labour force that couldn’t always move to where the jobs were.
Eventually the government decided that buy-to-let was distorting the market and it called time with a stamp duty hike, restricted tax relief on interest payments and tighter regulation on mortgages.
And that did the trick. In last year’s report, Savills said these measures had already led to a steep fall in those buying investment properties with mortgages and that the decline was likely to continue. Interest rates are still low and the introduction of restricted interest tax relief has been staggered, so, as the full effects work through, there’s likely to be a further fall in buy-to-let numbers.
But, there are still plenty of opportunities for would-be residential property investors to take advantage of a rising market. They could buy shares in housebuilding companies or in property funds. These are relatively safe investments, but they generally won’t generate the kinds of returns that a more direct participation in the market can bring.
Investing into property joint ventures
Fortunately for the investor, the internet has made available another way to share the benefits of residential property. The ordinary investor can now take part in joint venture property investing through online platforms that allow numerous investors to invest alongside each other - and importantly, alongside the house builders themselves.
A common way of structuring a property development, as it brings together a mix of different disciplines and expertise, as well as significant capital, joint ventures have increased in popularity in recent times as they’ve become increasingly accessible.
A co-investment approach to property investing, the everyday investor can take an equity stake in a residential property development project by buying shares in a Special Purpose Vehicle (SPV). A temporary subsidiary company, it’s a limited company and the money invested into or lent to it can only be used on a specific development.
With this approach, the investor’s risks are reduced, as exposure is limited to the amount invested, but there’s still the potential for good returns. If the houses sell for more than was projected, then the return for investors can benefit, because the amount returned to investors is a percentage of the profit achieved equal to the proportion of equity held.
As little as £1,000 can be invested in a single project, allowing the investors to spread their capital among a number of developments and so spread their risk. What’s more, the time frames for a return – typically 18 months to two years – are short relative to the possible returns.
There’s also the security of investing in an asset and, even if property prices were to fall, there’s still the option of renting out the homes until the market recovers. It’s significant that in this year’s report, Savills notes that while the government has put pressure on buy-to-let, it is showing growing support for the build-to-rent sector. It hasn’t yet delivered enough new homes to compensate for the flight of buy-to-let investors, so demand will remain high, and Savills predicts that this will drive rental value growth.
These vehicles and platforms provide the ordinary investor with a way of being able to share in the benefits of the property market. Even if there’s a lack of any specialist knowledge or experience, they have the comfort of knowing they are investing alongside property experts, who’ve done the research and know the market.
Becoming a residential property investor
It's always difficult to try and predict when to invest into an asset, and property isn't any different. No one has a crystal ball that allows us to see into the future. We ultimately have to complete enough due diligence to feel as confident as we can as an investors that now is the right time to invest.
So, with residential property values on an upward trend, rental values similarly set to rise and interesting new investment platforms and routes available, this certainly looks like it could be one of the best times to become a residential property investor.