New ways to invest in the property market
If you’re thinking of investing in residential property in order to generate an income, the good news is that rents are higher than they were a year ago. Private rental prices in England, Scotland and Wales rose by 2.7% in the year to September 2015, according to the latest figures from the Office for National Statistics. Unsurprisingly, London saw the biggest hikes with rents increasing by 4.1%.
On the downside, the Bank of England’s Financial Policy Committee recently noted that the stock of buy-to-let lending might be disproportionately vulnerable to very large falls in house prices. It said that buy-to-let mortgage lending had increased by 40% since 2008, compared to a 2% rise in owner-occupier mortgage lending.
However, if you fancy pooling your resources with other investors through property crowdfunding or want to help out a property developer through peer-to-peer lending, there are plenty of companies out there to help you get started.
If you don’t have enough money to buy a property or simply don’t want to put all your eggs in one basket, then you could consider property crowdfunding. Investing in property is always a risk, but crowdfunders argue that if you diversify your portfolio across the UK and vary the types of property, then it will be more resilient to fluctuations in prices.
Crowdfunding platforms, such as Property Partner, Property Moose, The House Crowd and Property Crowd, offer investors the chance to own a percentage of one or several properties across the UK jointly with other investors. Each property is bought by a limited company without the need for a mortgage, and then investors receive shares in the company, becoming instant buy-to-let landlords.
Platforms vary in the minimum investment you can make, ranging from £50 at Property Partner, through £500 at Property Moose, to £1,000 at The House Crowd; Property Crowd, which focuses on high-yielding, city-centre real estate, seeks a minimum investment of £5,000.
These platforms can also take quite a hefty fee – a fundraising fee of 5% is not uncommon, while some platforms take as much as 25% of the profits. What is more, your investment will not be protected by the Financial Services Compensation Scheme.
You’ll only find a couple of investment opportunities on each site at any one time to encourage investments to be funded fast. In November, Property Partner claimed to have set the world record for equity crowdfunding, raising £843,100 in just over 10 minutes to buy 42 flats in a converted mill in Gainsborough in Lincolnshire. In total, 318 investors made an average investment of £2,704.
It’s an exciting way to invest but the downside is you will have no control over setting the rent or managing the property. Worse still, if you need to get hold of your money fast, you will rely on selling it to another investor.
Patrick Connolly, a certified financial planner at financial adviser Chase de Vere, is not a fan of crowdfunding. He says: “As you’re not the sole owner of the property, you’ll have limited control. You’ll get a vote in decisions but cannot decide yourself who the tenants are, how much they pay or how the property is managed. Crowdfunding firms might also have the right to borrow against the property if revenues don’t cover costs, which would have the effect of reducing an investor’s stake.
“Another real concern is liquidity. If you want to sell out during the investment term, you could struggle to find a buyer who will pay what you consider an acceptable price and, even at the end of the term, you might disagree with the other investors over what is a suitable selling price.
“So while the idea of crowdfunding might seem appealing, you have to accept there are a number of potential pitfalls and you will have very limited control over your investment.”
Frazer Fearnhead, founding director of The House Crowd, agrees that property can take a long time to sell and there are significant costs but says buy to let should be viewed as a long-term investment. “Because of that, the property market is not volatile in the way the stockmarket is and property values won’t fall by a huge amount in a short space of time like they can with the stockmarket.”
Andrew Gardiner, chief executive of Property Moose, adds: “There are a number of reasons why private landlords may consider crowdfunding as an alternative to going it alone. Certainly, the changes to mortgage relief may see property investors wanting to take a more hands-off approach, while still using their funds to track UK property prices. As well as this, private landlords can now build a national property portfolio at the click of a button, without needing to have knowledge of local markets.”
Unlike crowdfunding, where you buy a share of a property with other investors, with peer-to-peer (P2P) lending, you’re lending money to the landlord or developer and don’t own the property yourself, effectively acting as a mortgage lender. Investors lend money for a fixed term and know what interest rate they will receive. Borrowers and lenders are matched and the loans are often secured against the property so if a borrower were to default, the property would be repossessed. From April 2016, P2P lending can be included in stocks and shares Isas and any interest earned will be tax-free.
Property is a fairly new area for peer-to-peer (P2P) lenders to get involved with. LendInvest, for example, launched in 2013, offering the chance to invest in secured property loans with a minimum investment of £1,000. Before they commit, investors can find out the interest rate they can expect, along with details of the property – its valuation, location and planned renovation – as well as the terms of the mortgage, its duration, loan to value, loan amount and repayment due date.
Christian Faes, chief executive of LendInvest, says: “Our loans last, on average, eight months, which means that often one investor will be invested in several loans at one time, each with different end dates. As such, we tend to appeal to the more active investor who will take time to compare our available loans, find the ones that most appeal to them and manage an active portfolio that generates consistently great returns.”
Landbay, which was launched in May 2014, offers buy-to-let residential mortgages in England and Wales, focusing on professional landlords who tend to hold their property portfolios in special purpose vehicle (SPV) limited companies. To date, it has lent £13.9 million through 80 mortgages at a total property value of £21.04 million. You can invest as little as £100 in either a three-year fixed-rate mortgage at 4.4% a year or a base-rate tracker at 3.5% a year.
It’s also worth considering more mainstream peer-to-peer lenders that also work in the property sector: for example, Assetz Capital offers loans to property businesses, investing in fairly large-scale developments such as student accommodation, while RateSetter offers loans for residential property development – but not for buy to lets. Its property development loans average at around £1 million overall with a typical loan term of a year.
Connolly, at Chase de Vere, says: “Property peer-to peer-lending is a safer option than crowdfunding and with lower costs, although you won’t benefit from any upside in property values.
“While the advertised returns will be higher than those achievable through bank and building society accounts, there is also more risk. The borrower could default and, at the very least, this would cause hassles; there is likely to be a lack of liquidity if you want to sell during the investment term; and, unlike with savings accounts, there is no protection from the Financial Services Compensation Scheme.”
“I always wanted to be a landlord”
Robert Ian Griffiths has invested £1,500 for three years through Property Moose in a mixed-use property comprising of four commercial units and one residential unit (pictured above).He pooled his money with 90 other investors to pay £186,000 for the project, which took just 28 days to be fully funded.
“I have been intending to become a private landlord for a number of years,” he says. “Due to time constraints such as work and hobbies, it was difficult for me to find the time to find an appropriate unit and the prospect of managing it into the future meant it was unfeasible.
Property crowdfunding has allowed me to invest in real estate, albeit with relatively small amounts, without having to take on any of the other obligations associated with being a landlord. I’m looking forward to creating a geographically diverse portfolio without all the hassle.”
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.