At £1.4trn, the UK buy-to-let market is well over twice the size of retail investors’ assets under advice.
A national obsession by international standards, buy-to-let in the UK has always been an amateur endeavour; one which has so far remained outside the remit of financial advisers.
This can present a problem.
Buy-to-let typically requires large sums for a single investment, meaning that even one asset can dwarf an individual’s managed investments.
Furthermore, the typical buy-to-let landlord will have one or two properties, often situated very near to their primary residence, meaning that the balanced portfolio advisers aim to provide can seem deeply undermined.
With the emergence of new investment solutions, combined with new changes to taxation prompting landlords to re-evaluate their position, now is the time for financial advisers to take the opportunity to close the residential property investment gap.
What’s changing in the market?
Buy-to-let investment has always had its issues, but changes to taxation since 2015 (as well as predictions about future legislation concerning tenant rights) mean Britain’s amateur buy-to-let landlords are questioning whether buy-to-let still makes investment sense.
Research from mortgage lenders continually shows that investors are aware of changes taking place, but do not understand them in detail, nor how they relate to their specific circumstances.
Financial advisers can help their clients to take a clear eyed-view of their buy-to-let investments.
What is their true financial position, after tax? Once time and risk are taken into account, does it really look like they’re paying off?
Do these investments meet the suitability and capacity for loss tests that are standard in other asset classes?
For many, the numbers will show that investing in individual buy-to-let properties no longer makes sense.
What alternatives can advisers consider?
Even when taxation, hassle and lack of diversification mean the business case doesn’t add up, investment in bricks and mortar is viewed in a different light, to the extent that 49 per cent believe property is the best way to save for retirement, according to the Office for National Statistics.
We believe the solution to this impasse is for advisers to offer products which allow clients to retain exposure to the residential property market, but in unitised vehicles that can complement existing portfolios, rather than dominating them.
Funds can be held in Sipps and Isas, making them much more tax-efficient than buy-to-let, as well as more flexible. These funds provide targeted exposure to a portfolio of residential properties, passing on property fundamentals without equity market distortion.
The entrepreneurial adviser can not only show their clients that direct buy-to-let isn’t working but allow them to retain property exposure as part of their risk-managed portfolio - clients can sell down their buy-to-let holdings, keep a foot in the property market through new products, and reallocate the rest of the proceeds into existing managed portfolios.