Traditionally the smaller investor’s favourite way to invest in the residential property market – away from their own homes – has been by buying property to rent to tenants.
This really took off in the 1990s with a greater spread of disposable wealth and rising property values, at which time the practice acquired the label `buy-to-let’. It seemed like a one way bet, with rising house prices giving healthy capital gains, at the same time as maintaining buoyant demand for rented accommodation from those who couldn’t afford to buy.
All good things must come to an end however, and it looks like the golden age of buy-to-let might be over. Its popularity was felt to be distorting the housing market, making it even harder for first time buyers to enter and, over recent years, the government has moved to make it less attractive.
It has, therefore, hit buy-to-let investors with a triple whammy of a stamp duty hike, restricted tax relief on interest payments, and tighter regulation on mortgages.
Changes in the property investment marketplace
In its latest report, Savills argues that while these measures have already led to a steep fall in those buying investment properties with mortgages, the decline is far from over.
Interest rates are still low and the introduction of restricted interest tax relief has been staggered, so the full effects have yet to feed through. Savills predicts a further fall in buy-to-let numbers.
This comes at the same time as housing has moved to the top of the political agenda. In the recent Cabinet reshuffle, the Department for Communities and Local Government became the Department for Housing, Communities and Local Government, underlining the commitment Prime Minister Theresa May made in a speech in November.
“We must get back into the business of building good quality new homes for people who need them most. That is why I have made it my mission to build the homes the country needs and take personal charge of the Government’s response.”
The industry is building 210,000 new homes a year in England, more than at any time since the global financial crisis. But the Government’s consultation on assessing housing need sets the annual housing requirement in England at 266,000, while the House of Lords Economic Affairs Committee suggested over 300,000 new homes are needed each year to have any impact on affordability.
So there’s a considerable following wind behind housebuilding and that’s apart from the already existing levels of demand to drive new-build.
Housing market growth for the North East of England
Savills argues that outside the Home Counties, in areas where incomes have grown more in line with house prices, there’s potential for growth. It particularly expects the North to outperform London and the rest of the country. For the North East it forecasts a five-year compound house price growth of 17.6%, against a UK average of 14.2%.
So, on the face of it, it looks like we have a situation where an active residential housing market is going to grow with more houses being built, just as the most popular way for the small investor to share in the market is being closed off.
This, however, would be a superficial reading of the situation and risks ignoring some of the great property investment opportunities that are still out there and new ones which are being opened up.
So what property investment opportunities are available?
We’ve talked in-depth on property investment and options such as student accommodation, houses of multiple occupation, the private rented sector, off plans and refurbishments. That’s not to forget commercial property investments in office, industrial and retail sectors.
Two developments have come together which allow the smaller investor to have a share of the residential property market. Digital technology has made it much easier for individuals to make financial investments and this growth of fintech has led to alternative investment platforms.
Generally this manifests itself in the form equity crowdfunding, a sector that was worth £332m in 2015 – a near three-fold increase on the year before - and £87m of this was in property.
With these online platforms enabling large numbers of investors to co-invest alongside each other and professional investors and institutions, automated processes have also reduced the minimum investment amount, opening up opportunities at all levels.
These smaller minimum investment amounts also allow everyday retail investors to assemble diversified portfolios to minimise exposure to risk in any single location or sector.
The good news for those wanting to invest in property is that these online co-investment platforms can be used to invest in housing projects, generally through Special Purpose Vehicles (SPVs).
An SPV is a legal entity created solely to serve a particular purpose, which could be a housing development, or a series of developments. It would be set up as a private limited company in which investors can buy shares. Those shares in the company or SPV will allow the shareholder a share of the profit generated by the SPV when the development is completed and the houses are sold. The SPV is then wound up and the investors' capital is returned, along with any profit.
Clearly, the amount of profit made by the SPV will depend on factors such as the smooth delivery of the development, without unforeseen costs being incurred, and demand for the new properties being strong enough to attract the expected price. Of course, if costs are lower then budgeted and if the houses sell for more than forecast, then profits will exceed expectations and so will the investors’ return.
Property investing and short term equity investments
The beauty of investing in residential property development is that, as an equity investment, the return comes in the form of capital growth and it usually does so within a relatively short period of a year or two. Significant capital growth usually only comes from long term investment.
This makes shares in a residential property SPV a valuable addition to a diversified portfolio of investments. The SPV can deliver short term capital growth alongside equities offering the possibility of longer term capital returns and peer-to-peer (P2P) loans yielding a regular income.
The broader trends in the residential property market identified earlier make these SPVs particularly well-suited for funding developments.
The rise of the smaller house builders
Following the financial crash of 2008, the ranks of small and medium sized housebuilders, which generally speaking lacked the resources to survive the subsequent market downturn, were much depleted.
But, as Savills says in its report, we have seen these smaller players re-entering the market and they are the players most likely to be able to deliver the change needed if this country is going to build anything like the number of houses it needs.
However, it is independents of this sort of size who are most likely to have difficulty in raising the necessary funding from the banks on reasonable terms. For them, equity co-investment through SPVs can bring access to a wide investing public which wants to share in the benefits of a vibrant residential housing market, but finds the buy-to-bet route - unsurprisingly now - increasingly unattractive.
Our next exclusive property investment opportunity
It’s against this background that we at Growth Capital Ventures, through our online co-investment platform GrowthFunders, are introducing our latest residential property investment opportunity in Chilton, County Durham.
GCV is seeking to raise £400,000 of investment, alongside the senior debt, to finance the residential development and sale of 14 luxury family homes. Funds will be raised through the sale of shares in the SPV Carlton SPV 1 Chilton Limited.
Targeting a 1.5x return on investment, the site will be acquired with the benefit of detailed planning consent for the build of the 14 three and four bedroom homes for private sale.
The scheme has been identified and taken through the planning process by GCV sister companies and joint developers Homes by Carlton Limited and CoreHaus Limited. Core Haus are backed by leading social enterprise and procurement specialists Fusion21 Limited, which is co-investing and anchoring this equity round.
The scheme will feature three CoreHaus homes, designed to introduce modern methods of construction and increase the speed of build on site.
The site was originally marketed for sale with a lapsed planning consent at £450,000, but the developer is acquiring the site for £350,000. GCV investors will receive a 50% share of profits from the developer.
Demand for good quality housing is particularly buoyant in this part of County Durham. There has been a significant amount of investment into the area, with the development and expansion of regional business parks neighbouring Chilton, including Aycliffe Business Park, Newton Aycliffe, and the development of Net Park in Sedgefield.
Work is scheduled to start on site in the second quarter of this year, with an estimated 18 month rolling build and sales programme, and further details on this property investment opportunity are available here.