With buy-to-let landlords feeling the squeeze, we highlight other ways to invest in UK property.
The buy-to-let market is undergoing a shift change. Long seen as a way for people to earn good returns on a stable investment, the shine has come off it in recent years.
Landlords are now facing a much stricter tax regime, with some looking to exit the sector because of a string of new tax rules that have reduced profits. So how else can you get exposure to the property market? We explain your options.
A changing market
There have been many tax changes affecting the buy-to-let market in recent years, with many landlords left with a much lower return than they had previously enjoyed.
One of the biggest changes came into force on 6 April 2017 and limits how much landlords can offset against their tax bill. Previously, property investors were able to claim the cost of mortgage interest payments.
However, this is now being limited so that landlords can only claim at the basic rate of tax – 20% – regardless of their actual tax band. The changes are being phased in between 2017 and 2020.
Another tax change, imposed in April 2016, is the extra 3% stamp duty rates charged to those buying an additional property, pushing up the price for those trying to expand their portfolios.
Landlords have also been hit by the removal of the ‘wear and tear’ allowance. Previously, a landlord was able to claim 10% of the annual rent costs as wear and tear, regardless of whether they upgraded their property or not. Now landlords can only claim when they actually improve their properties.
Yields have also taken a sharp downward turn. Data from estate agency chain Your Move shows the average return on investment for buy-to-let properties in England and Wales was 4.4% in January 2018, well down on the 5.1% recorded in January 2016. But there are other ways to invest in the property market.
Property funds can be a great option for investors looking for exposure to property without owning a property directly. This means you can invest a much smaller amount of money and your risk is spread across many properties, rather than just one or two, as would often be the case in buy to let.
It is important to note that property funds tend to contain large amounts of commercial property exposure, rather than residential homes.
Dzmitry Lipski, investment analyst at platform Interactive Investor, Moneywise’s parent company, says that the market has performed strongly in recent years.
He says the IPD UK All Property Index – which is considered a proxy for the performance of UK commercial, residential and industrial property as a whole – has returned 11.2% to investors in the past year.
This has also delivered annualised returns of 9.14% over a three-year period and 11.5% over the past five years. While housing growth in London has slowed, Mr Lipski believes the sector still represents a good investment opportunity.
He says: “In the long term, property should continue to generate an attractive yield relative to other assets and provides portfolio diversification.”
There are other issues that could deter investors. In the weeks following the UK’s vote to leave the European Union in the summer of 2016, many property funds suspended dealing while others lowered the value of their fund to stop the number of customer redemptions, though all have since re-opened.
Jason Hollands, managing director of investment firm Tilney, says investing in property funds using a tax-free Isa is a good way to avoid the additional charges levied on buy-to-let landlords.
“For those who like the idea of property as an asset class from a pure investment perspective, it can be accessed through funds held within the tax efficiency of an Isa or a pension,” he says.
“This has the further benefits of achieving diversification and – other than in extreme market conditions – daily liquidity so you can buy more or sell down.”
Mr Lipski says that the F&C Commercial Property Trust – which is the biggest UK property investment trust – is a good option for investors. The Kames Property Income Fund and Picton Property Income Trust are also worth considering. These three funds are all members of the Moneywise First 50 Funds for beginner investors. For more information, go online to Moneywise.co.uk/fi rst-50-funds.
In recent years, many property-focused peer-to-peer (P2P) providers have launched products for those looking to invest in bricks and mortar.
Sites such as Landbay, Lendy and Proplend allow investors to make property-specific, peer-to-peer investments. Like traditional investment, this has the benefit of allowing much smaller levels of investment but there are extra risks associated with peer-to-peer lending.
Study each platform carefully to see the type of property it invests in. Some peer-to-peer platforms focus on property development and bridging loans – expensive loans on high-value properties – rather than on individual properties.
John Goodall, chief executive of Landbay, says that many former buy-to-let investors are now looking at alternative investment, although there are drawbacks. “People may have chosen to use us because they have been put off by the increased stamp duty or changes to tax,” he says.
Investors receive interest on their investments at the end of each month, but Mr Goodall says that they “don’t get exposure to the underlying gains in the property’s value”.
Each P2P platform has its own underwriting standards, so make sure you are happy with the quality of the loans that the platform will hand out using your cash.
Remember, in some cases, the owners of the properties will be looking to alternative financing sources such as peer to peer as they have been unable to get finance in a traditional way from a bank. There is also the risk of the platform itself going bust, as your cash will not be covered by the Financial Services Compensation Scheme.
Crowdfunding has become a popular way to invest in bricks and mortar via specialist websites, such as The House Crowd, Property Moose, Property Partner and CrowdLords.
Crowdfunding allows people to invest in property without the need to get a mortgage or manage tenants – the latter is done by the crowdfunding site for a monthly fee.
People can often invest with small amounts – from as little as £50 with Property Partner. You simply register as an investor on the website and select those properties you want to invest in.
Crowdfunding is different from P2P lending in that investors are contributing cash in return for equity or a stake in the property. They make their money from both rental income from tenants and capital growth, rather than investing in a loan or debt secured on a property.
Is property investment wise?
Regardless of how you choose to invest, is now a good time to invest in property? The strong growth in the London market has cooled, both in terms of rents and house prices, although other areas continue to grow.
Ryan Hughes, head of fund selection at AJ Bell, says that property investment of any kind should be viewed over the long term, although investors need to remember that selling properties can be very diffi cult in a falling housing market.
“The asset class is best suited to long-term, patient investors and anyone who feels they would want to whip out their cash at the first sign of trouble should carefully consider the suitability of any exposure to residential property funds,” he says.
“After all, this is not a liquid asset class, in that the underlying buildings cannot be bought or sold quickly, although the funds will hold some cash to try to provide liquidity for investors should they require it.”
He adds: “The long-term case for residential property rests on its long-term track record of providing inflation-busting returns, via a combination of capital growth and rents, as well as the ongoing near-term imbalance between demand for dwellings and their supply.
“However, the danger is that the combination of high prices, flaccid wage growth and interest rate increases takes the steam out of house prices, potentially knocking asset values at residential property funds.”
“You have to take a long-term view”
Stuart Haining runs an online marketing business and is based in Northamptonshire. The 59-year-old has a portfolio of 14 buy-to-let properties, but wanted alternative ways to invest in property, partly because of the increased taxes levied on landlords.
He used online investment platform Bricklane - which enables you to invest in property through Isas and Sipps - to invest in property, as well as having a varied portfolio of non-property assets.
“The tax changes were a reason for not going into the market again and also because we didn’t want to stretch ourselves by buying another property,” Mr Haining says.
“We were recommended Bricklane by a friend. We tested the water for a while and then gradually increased our holdings. Property investment is appealing because the returns are good, and this takes some of the hassle out of investing.”
Mr Haining now has around £100,000 invested through Bricklane, all held within a tax-free Isa. He is aware that house prices could go down, but says this investment matches his risk profile. “As I am approaching retirement, I am less interested in capital growth, but I care more about monthly income,” he says.
“You have to take a long-term view on property but with this type of investment you can usually get some cash out if you need it, rather than having to sell a property, which can take months.”