A growing number of Brits are planning to invest in property to generate income in retirement as many remain wary of the effect markets have had on their savings and pensions.
In January, inflation sat at 10.1 per cent - a 40-year high for the UK. This, paired with a resistance among banks to pass on interest rates despite successive base rate hikes, has left many thousands of pounds poorer.
In tandem, many have also seen the value of their pension pots decline following turbulent gilt markets last year. Consultant XPS Pensions suggested drops in value of around 35 per cent over 2022.
As a result, ‘safer’ assets such as property have seemed more appealing of late.
Research by tax adviser Cornerstone, based on responses from 2,000 people, found 25 per cent of savers plan to invest in property to generate income for their retirement.
Group chair at Cornerstone Tax, David Hannah, told FTAdviser: “Cash savings have not performed particularly well since the great crash of the noughties.
“Property, on the other hand, has been pretty stable and inflation neutral.
“Over the long haul, say five to 10 years, property will show good returns in terms of capital.”
During the pandemic, house prices grew 20 per cent over three years - compared to 7 per cent the previous three years.
More recently, house prices have slowed.
Last month, house price growth contracted for the first time since June 2020 after successive falls in growth.
Some brokers believe prices will not fall by much this year, saying any amount they do fall by is simply a market correction following inflated growth during the pandemic.
Meanwhile, housing policy experts have more recently predicted a period of stagflation for house prices, versus the significant drop - anywhere between 5 and 20 per cent - feared by economists late last year.
"It comes as no surprise to see that a growing number of soon-to-be retirees are looking at property as an investment for their retirement,” said Hannah.
“Bricks and mortar represent one of the few assets that can rise in line with inflation.”
Rise of the conservative landlord
Hannah said with rental income currently under pressure and many landlords now overleveraged following interest rates rises, it may seem an unwise move to become a landlord.
But instead of putting people off buy-to-let completely - a market already increasingly weighed down by regulation and tax hikes - recent market behaviour seems to be encouraging a more conservative wave of landlords, Hannah explained.
He added: “Conservative borrowers will go 50 per cent loan-to-value, or 60 per cent loan-to-value, which the banks like.
“This means mortgage payments are lower then, and because lots of buy-to-let borrowers fix for three or five years, this means a fixed cash flow out as well as in. It will provide them with a steady income.”
Equity release is also a route those approaching retirement can take, and have already been taking according to advice firms such as Knight Frank Finance.
Traditionally, equity release has been used by buy-to-let landlords. Every three years or so, they remortgage and get their property - or properties - revalued.
The equity they release they then use to live on or invest into another portfolio property.
“In retiree terms, this means the extraction of cash flow with no tax on it. It’s a useful source of funding,” said Hannah.
Buy-to-let investors flocking to new builds
But the tax boss warned that any retiree looking to get into the buy-to-let space needs to evaluate their investment.
“I met a man in Essex who purchased a HMO [house in multiple occupation] in Leeds. He didn’t realise he had bought a Grade 2 listed house and needed to pay massive costs in refurbishments.
“He was a retired train driver. He said he rushed it.”
The raft of tax and regulatory changes, while making it harder for landlords to operate profitably, have steered many buy-to-let investors to new builds.
“Ironically this is where first-time buyers are also looking,” said Hannah, suggesting any surge in buy-to-let purchases will squeeze an already stretched housing supply.
"If you look to invest in a property which is less than five years old it should limit the amount of extra work you would need to do."
Currently, 40 per cent of landlords in the UK are aged 55 and more than half of them consider their rental income to be a key part of their retirement income, according to the National Landlords Association.
ruby.hinchliffe@ft.com
