Property Markets


Property Markets

There are many ways to be exposed to the property market as an investor, and there are a multitude of property markets or types of property investment.

The first thing to decide regards property investment is whether you wish to actually have direct ownership of the tangible bricks and mortar yourself, be indirectly invested in property via a property fund, or be an investor/lender via a peer-to-peer lending platform or direct third party loans (not via a platform).

There are three main potential ways to make a return:

  • Rent - your monthly income received by letting out the property to tenants
  • Selling for a profit - if you buy property & then sell it at a higher price, net of costs
  • Interest - your monthly income received for lending funds to property investors

The risks of property investing include:

  • Demand for rentals can go up and down - therefore affecting the rental income you could receive
  • Property prices can go up and down - meaning you could sell at a loss
  • Development risk - not all property developments run smoothly and often do not turn out as expected, You may not receive all of your loan capital back - a bigger risk than many investors think

Buying Bricks & Mortar

Investing in property has generally been a good bet (subject to the risks mentioned above), with the value of the asset likely to increase in the long term, whilst in the short to medium term you are receiving a monthly income in rent.

However, you'll need a large amount of capital as a deposit, generally at least 20-25% of the property price for buy-to-let (BTL) and qualify for a mortgage on the rest. You will also need funds for other costs such as Stamp Duty (SDLT), legal fees, mortgage arrangement fees, valuation fees, etc.

There have also been a number of tax changes for UK property investors recently that also need to be taken into consideration.

Next is to decide whether you want to be a passive investor in property - invest, sit back, and leave the ongoing management to someone else such as a letting agent - or whether you want to create a more active property investment that looks more like a business.

You also want to decide whether you wish to be involved in commercial or residential property investment.

Buying a single family home or flat as a BTL investment, and arranging for a letting agent to deal with all tenant finding and property management is about as passive as it gets for direct property investment. Or, as an alternative, buying a commercial property - a shop or an office - again where a good quality agent looks after management, rent reviews, tenant find, etc. is also passive.

Property investment strategies such as

  • Houses of Multiple Occupation (HMO) - houses rented by the room by sharers. These could be young professionals or students
  • Serviced accommodation / apartments
  • Self managing single let BTL properties - especially if they are farther afield from home
  • Property development - either residential or commercial

are all very active strategies and are more like running a full or part time property business rather than just a property investment. They can be very lucrative but at the same time take up a lot of time of you, the investor, or maybe I should say Landlord (as a landlord is a more active arrangement).

Buying Property Investment Funds

You can invest in a pooled (or collective) property fund where a professional manager collects money from many investors and then invests the money directly in property or in property shares. These professional managers, called fund managers, charge a fee for this service. Dividends paid from the fund, as well as capital gains are also classed as taxable income. The fees and tax will obviously reduce your net returns. However, property funds can be held within tax efficient wrappers such as a pension or an ISA.

These types of funds can invest in commercial or residential property, and can be in UK property or overseas. Common types of property funds:

  • Property unit trusts
  • Property investment trusts
  • Offshore property companies
  • Real estate investment trusts (REITs)
  • Shares in listed property companies
  • Insurance company property funds

Buying a Share of a Property

There are now some crowdfunding platforms that offer you exposure to the residential, commercial or student property market in the UK. These platforms allow you to have a share of a property, and invest a smaller sum (subject to a minimum) in the property deal rather than owning the whole property yourself.

You would then look to gain from the property rental income and any capital growth over the term you hold the investment.

As they are in their infancy, it is still to be seen whether there is a secondary market for these "shares" to be traded or sold on.

Some of the platforms enforce sale of the property if a number of the "shareholders" wish to sell which may be an issue if the property market is in a low point of the cycle.

Peer-to-Peer Lending

Peer-to-peer lending (P2P) is when two parties are brought together - one to lend and one to borrow. The process is usually carried out via an online platform specifically setup for this type of transaction and this type of lending bypasses a traditional bank of building society. The idea being that without this intermediary, the investor/lender receives a better return on their money.

The P2P market has developed from matching individual lenders to borrowers to now aggregating funds and the investor/lender's money being split across multiple loans.

In the case of property related loans, you have the option of making a loan to an individual property developer for a specific project for a certain period of time (with or without first charge security) where you will see details of the specific property project, or if your funds are split across multi projects you will have less / zero visibility of who the monies are being lent to and what projects are involved. Often, some of the risk of default can be mitigated by spreading the risk across multiple loans.

The interest you earn from investing via peer-to-peer lending is subject to income tax, and currently is covered within the personal savings allowance (meaning every basic rate tax payer can earn £1,000 in interest without paying tax on it, higher rate tax payers it is limited to £500).

However, some providers let you put your money in an ISA - the "innovative finance ISA" (IFISA) - meaning you can lend out up to the annual ISA allowance (currently £20,000) within an ISA wrapper, so interest on that portion of money will be tax-free forever.

In return for tying up your money, for varying terms (12-18 months for development type loans upto several years for other loan types), and taking more risk on in some cases less creditworthy borrowers, peer-to-peer lenders are able to earn rates of interest which far exceed those on comparable corporate bond funds or gilts.

The degree of risk being taken is increased immensely with this type of investment and the sector has had issues over 2018 & 2019, with a higher default rate - arguably due to a lax credit policy up to this point.

Some would also argue that development finance is unsuited to a peer-to-peer funding model as it involves borrowing money to buy or build a property and investor's returns are often dependent on the successful completion of the project and its uplift value at the end - something that is particularly tricky to predict and many get wrong. The degree of due diligence required is high, and I often hear the phrases (from borrowers) "double due diligence" and "bank grade due diligence" has been carried out. This is more a sales pitch than anything else.

As always, I would always ensure that you have a high degree of trust in the borrower, their track record, their project, the sector that project is in, their numbers, and their back-up plan plus their overall personal financial position before lending, together with understanding their reasons for not using a bank or traditional lender (which could be entirely reasonable).

These types of investment are regulated by the Financial Conduct Authority, however the P2P platforms are not covered by the Financial Services Compensation Scheme (FSCS).

Direct Third Party Loans

Similar in nature to one-to-one peer-to-peer lending where one lender lends money to an individual or company to either a build a portfolio of property over the long term (so loans for terms of 5 years plus) or shorter term bridging type loans to enable property development or HMO conversion.

These loans are not to be entered into lightly as the risks are often far higher than most investors/lenders realise.

Again, I would always ensure that you have a high degree of trust in the borrower, their track record, their project, the sector that project is in, their numbers, and their back-up plan plus their overall personal financial position before lending, together with understanding their reasons for not using a bank or traditional lender (which could be entirely reasonable).

I have seen many of these types of loan be positive for both lender and borrower. However, I have also seen them go horribly wrong.

These type of loans are unregulated by the FCA and not covered by the FSCS.

The Value of investments and the income from them can fall as well as rise, and you may not recover the amount of your original investment.