Not a day goes by without property prices making the news.
Residential property is a national obsession, and at over £7trn in value and representing over 50 per cent of the nation’s wealth, the UK housing market is larger than the UK equity and commercial property markets combined.
The rewards have been outsized for those able to participate in residential property as an investment, with £1.4trn of assets currently in buy-to-let (BTL). Strong returns are often referenced as the sole reason that 2.5 million people participate in this market, but it also has many attractions with regard to risk.
Press coverage will inevitably focus on changes in house prices, but residential income has offered steady, consistent returns that broadly correlate with consumer inflation, and behaves well during downturns relative to income from commercial property.
While everyone knows that property prices go down as well as up, many value the tangibility of the investment and, with 80 per cent of the asset class unlevered, it is relatively low volatility versus the equity markets.
Source: CML Landlord Survey 2016
This attachment to property remains strong – 49 per cent of people think it is the best way to save for retirement, according to a recent study by the Office for National Statistics.
But against a backdrop of tightened lending, growing tax charges, more onerous tenant legislation and faltering capital values in some markets, it pays for individual investors to consider the specific risks of their BTL investments – the traditional way of investing in residential.
Many risks associated with direct property investment are easily grasped by most investors.
They concern asset selection (what type of property, where, and how many), value preservation (property maintenance and tenant management), sources of financing (mortgages and tax treatment – particularly in light of the shock change to the rules in 2015), and timing (when to buy or sell, and any opportunity costs to tying up capital).
Though they may be generic, these risks are still hard to manage.
- The UK population likes to invest in residential property
- Buy-to-let has become less popular due to tax changes
- Investing in a Reit or via crowdfunding platforms are alternatives
Take the first category: identifying a good property in a good area is time-consuming for the average investor, and investing ‘away from home’ is harder still.
Unless your client is buying a portfolio of properties as a semi-professional, most end up purchasing an individual property around the corner from their primary residence.
Close to home
The Council for Mortgage Lending Survey in 2016 showed that landlords overwhelmingly own investment properties close to home. Not only does this mean missing investment opportunities further afield, it also means doubling-down on concentration risk in a particular geography.
While rental income across the asset class is relatively dependable, rental income for a given property is not. Individual investors must shoulder the burden of voids, maintenance and tenant disputes, making the cash required to maintain the investment potentially lumpy and unpredictable, not to mention the hassle involved.