Brexit? Who Cares! Investment in UK Residential Property Up 150%
The uncertainties of Britain’s departure from the European Union hasn’t stopped investors from backing the UK’s residential sector. On the contrary, total investment volumes rose by some 150% to 6.8 billion euros in 2018, according to JLL report. London helped lead the charge, with investment volume nearly doubling to 2 billion euros compared to 2017.
No doubts that one can earn good money from buy-to-let property. With the growing UK population, supply for housing is no longer meeting demand. And market prices are only set to increase in the coming years. This opens an opportunity for property investors, especially if they can adapt to the changing buy-to-let market.
Let’s look at how buy-to-let property investment works in 2019.
The pros and cons
As with any investment, buy-to-let has advantages and disadvantages. Its benefits include:
Income generation – By investing wisely, you can earn enough from a property portfolio to replace your employment income, giving you freedom to focus on the things you love. Buy-to-let is also a great way to supplement a pension.
Capital growth – Over the long term, the value of property investments should increase. Buy-to-let property investments can therefore form part of your pension pot for retirement, or part of a nest egg for your children.
Spreading risk – All investments come with risk, so it makes sense to spread that risk. And if you’ve already invested in pensions, bonds and shares, buy-to-let property allows you to diversify.
However, property investment has its risks and limitations, too, including:
Time commitment – As a landlord, you are responsible for managing your property. You will have to deal with either tenants or letting agents, and handle maintenance requests and complaints, which can be time-consuming and expensive.
Limited access to your money – It can take time to sell property, so you may not be able to access your money in a hurry. This differs to shares, bonds and gilts, which you can sell relatively quickly.
Capital loss – Property values can go down as well as up, so there is no guarantee you will get your full investment back.
Potential income loss – The income from a buy-to-let property investment relies on the rent you receive. But if you find yourself without a tenant at any point, or if your tenants refuse to pay, you won’t have an income and you’ll still have to pay the mortgage.
These considerations mean that buy-to-let property investment isn’t for everyone. But if you have the available capital, it can be a great investment.
The costs of investing in buy-to-let property
There are several costs to consider when investing in buy-to-let property, including:
Conveyance costs – Buying a property can be a complicated process. You’ll need to pay a solicitor or licensed conveyor to carry out the legal work.
Stamp Duty Land Tax (SDLT) – Buy-to-let properties now come with an extra 3% SDLT surcharge on their value. This applies to all residential dwellings worth more than £40,000.
Refurbishment costs – To attract the best tenants, your property needs to be in great condition. And if it needs refurbishment, you’ll have to fund it. You can, however, offset at least some of these costs against your taxable income.
Strategic investment: Types of buy-to-let property
But what kind of property should you invest in? Your four main options are:
Single let properties
A single let property is a house or flat let out to a single person or family. They are the most common choice for new investors, offering a relatively simple, low-maintenance way of entering the buy-to-let market.
Houses of multiple occupation (HMOs)
HMOs or ‘multi-lets’ are large properties where tenants rent an individual room. Typically, each tenant will have their own tenancy agreement, covering all bills as well as the rent. These properties are more demanding as you have more regulations to follow, but they also offer higher returns on your investment.
Holiday lets and serviced accommodation
Holiday lets are taxed like commercial properties, so you can offset 100% of the mortgage interest against the rental income. And while managing a holiday let is more demanding than a standard residential single let, a good letting agency can handle the extra work for you.
Diversifying is the key
Investors - keen to increase yields and deliver portfolio returns - are now focusing on a broader range of property investment types. Investing in the UK property market beyond the three main sectors - offices, retail and industrial – means diversifying into hotels, student living, residential, healthcare, data centres, self-storage and car parks.
In 2018 28% (£17bn) of all commercial real estate investment in the UK was in alternatives - the highest level on record.
Over the last decade (2009-2018) we’ve seen the attractiveness of alternatives grow to deliver impressive performance, view the key highlights:
Drivers to Alternatives
Institutional investors are seeking sustained income streams. The combination of decreasing lease lengths and fierce competition for prime assets in mainstream sectors has made low-yielding alternatives look competitive, particularly over the long term.
Alternatives Investment Strategy
Alternative property types are distinct specialist sectors that have varied demand drivers and investment traits, so investors should avoid a combined investment allocation.
Portfolio acquisitions are the most common way to access the best assets and strongest covenants. Investors are acquiring, or partnering with, dominant operators to quickly gain specialist knowledge and economies of scale.
"Investors are seeking better yields and are increasingly prepared to consider a wider range of property types, different financing options and adjusted risk returns to achieve their goals.” David Haynes, UK Capital Markets
Based on www.propertyinvestortoday.co.uk