Property Frontiers UK | Property Investment Company | Buy to Let Property..
Property Frontiers is one of Europe’s leading firms specialising in the international property investment market. With a reputation for offering the best international properties, eco and green investments we have won respect by acting as a regulated company in a largely unregulated market. Get to know us and follow our latest adventures both in the office and further afield.
Every so often, you discover a property investment that has something particularly special about it. It might be a residential scheme with a particularly good location or a luxury resort that completes just as a tourism boom takes off.
When it comes to Danum House in Doncaster, it was the building’s eye-catching Art Deco design that first piqued our interest – along with its superb town centre location, of course. Now, this unique building is about to complete, with the whole site shortly ready to open its doors.
The exterior signage is already up at Danum House, stirring up local interest. Meanwhile, the most recent images of the finished apartments are catching interest from property investors both locally and further afield.
Ray Withers, CEO of Property Frontiers, comments,
“This is always an exciting stage in an investment project. For those who invested early, it’s chance to see the finished product, as they wait for the first tenants to move in.”
It was important throughout the development process that Danum House retained its original character. That meant sourcing tiles that were an exact likeness of the originals, as well as creating a contemporary yet vintage vibe within the apartments themselves.
With final completion within touching distance, it’s time to celebrate the unique offering of this site. Just a two-minute walk from Doncaster train station, the apartments are ideally positioned for getting the most out of life in the centre of town. The building sits directly opposite the Frenchgate Shopping Centre, positioning residents at the very heart of the action, whether it comes to employment opportunities, eating out or indulging in a spot of retail therapy.
According to a recent Global House Price Index report issued by Knight Frank– Central and Eastern Europe are emerging as an area of growth whilst Swedish house prices are declining for the first time in six years. Average values of residential property across 57 countries and territories worldwide increased by 4.9% in the year to September 2018. This was the index’s lowest annual rate of growth for two years.
The Q3 2018 results show Hong Kong currently leads the rankings for annual growth in the year to September 2018, but it may relinquish this top spot in the coming months. It is anticipated that this growth will soften in 2019 following multiple consecutive years ranked as the fastest-growing and least affordable on earth. But any downturn is unlikely to last a long time and will hopefully usher in a future of more sustainable growth rates.
In terms of outbound Chinese capital, property investments have historically been focused heavily on New York, London, Sydney, and Tokyo. 2019 could be the year in which Chinese investors begin to diversify. With booming cities like Berlin, Amsterdam, and Seattle currently receiving less than 1.5% of the $94bn pot of Chinese cross-border investment since 2013, there is ample room to share the love. (JLL)
Stay tuned for further insight into 2019 – if you have any questions about investment opportunities don’t hesitate to contact us. Click HERE to find out more about current investment opportunities in Asia.
In this issue of PF Meets… we speak with Tim Woods from Rethink Living – the team behind Rethink @ Park Central Residence Serviced Apartments in Bradford.
Can you tell us a little about your experience in the Serviced Apartment market?
Rethink Living provide high end Serviced Accommodation throughout the UK. The past few years have seen the company expand its product offerings to partner with investment landlords and provide higher yields on their investment.
What makes Rethink Living different from other operators?
Rethink Living are not just managing agents – we have a portfolio of Serviced Apartments which we operated as landlords. Our day to day operation runs smoothly due to the measures and procedures put in place regardless of the type of guest staying with us. This combined with our first-class communication, interior design and marketing makes us a truly top-class company trusted to run Serviced Apartments on behalf of investors.
What services are offered to make Rethink Living stand out from the competition?
Our service and attention to detail is what makes us stand out from our competitors. We have a very minimalist and modern look across our suite of apartments and work tirelessly to ensure guests have their needs catered for.
In addition to the items provided in a standard hotel room i.e. linens, towels toiletries – guests have full access to a kitchen with all the amenities provided to utilise during their stay. Any special requests are catered for such as airport transfers or late check out’s etc. where ever possible but whatever the request our team is on hand to assist.
What makes Bradford such a great location for Serviced Apartments?
Bradford as a city has been undergoing significant redevelopment work over the past couple of years – with redevelopment comes growth for business and tourism alike. Hence the need for new, quality Serviced Apartments like Rethink @ Park Central Residences. Click HERE to find out more about Rethink@Park Central Residence.
Have you operated apartments in the Bradford area before?
Currently Rethink do not manage apartments in Bradford, as until now the right development for us had not materialised.
It is our policy to only take on exceptional developments in a city – ensuring that we select the right development in the correct location to get the best returns for our investors. Our decision to select only the best is why we have chosen to partner with Property Frontiers at Rethink @ Park Central Residences development.
Why do you feel Rethink@ Park Central Residences will be so attractive to those looking to stay in Bradford?
The location is ideally located opposite the redeveloped Westfield shopping centre, right in the centre of the city within a short distance of transport, shopping, restaurants, bars and entertainment options – all of which are needed for serviced accommodation to work well.
Is there a typical guest who would stay at Park Central Residences?
There will be a mix of business and holiday tourist guests looking to stay at Park Central Residences. We foresee it being an incredible option for relocation agents who are looking to put staff members in short term accommodation before moving them into a permanent residence or they are moved to other assignments. The apartments are also a great option for visiting family and holiday makers looking for a stop off on the way to other places.
Can you tell us a little more about the shared revenue model? How does it work?
The shared revenue model gives investors the maximum opportunity of receiving the very highest returns on their investment property. Essentially each investor will enter into a joint revenue share with Rethink Living, the investor will receive an 80% (and Rethink Living 20%) split of the monthly generated revenue. By structuring the deal in this way, it gives incentive for Rethink Living to promote and gain the maximum occupancy for each apartment, this is because the revenue split means the company only gets paid based upon revenue generated rather than any fixed monthly cost, in our experience we find incentives allow operations to perform to their very best ability.
Are there any additional costs landlords should budget for?
The operational costs such as Online Travel Agencies fees, Card Processing Fees, Linen Hire, Utility Bills, Rates, Housekeeping services, consumables (shampoo, tea, coffee etc.) and maintenance along with guest cleaning fees are all subtracted from the investors 80%.
Click HERE To find more about Rethink Living or if you would like to find out more about Serviced Apartment investing please email@example.com or call us on 0207 993 8888 and our Investment Consultants will be glad to assist.
Over the past decade, Southeast Asia has emerged as the world’s fastest rising economic engine, and an increasingly popular area for investors seeking to maximise returns overseas. Made up of more than 7,000 islands, the Philippines is one of Southeast Asia’s most exciting investment prospects.
The global hospitality industry is booming with the Philippines proving an extremely popular holiday destination thanks to its island hopping, stunning beaches and richest biodiversity. With Colliers forecasting a 10-15% increase in foreign arrivals over 2018 and international visitors driving the luxury segment, the constant source of demand is keeping returns high.
With its targets for increased infrastructure spending, and desire for tourism to proceed sustainably, the government of the Philippines is demonstrating its focus and commitment in the long-term success and stability of its already successful tourism market.
Now just weeks away from the formal opening of our latest resort investment – Portofino Oceans Edge, we thought we would share some of the key questions our clients are asking. Covering everything from how the returns are calculated through to foreign ownership regulations, these FAQs are essential reading for any client considering investing.
How does ownership work? Can foreigners own property in the Philippines?
Unlike many emerging markets the Philippines has a history of encouraging foreign investment through the gradual relaxation of rules governing foreign ownership. Since 1974 foreigners are entitled lease property including private land for up to 50 years, with an initial 25-year period renewable once for a further 25 years. This is the structure in place at Portofino Ocean’s Edge Resort.
Am I right in saying that I can use the resort myself. How does this work
Yes, this has been a key buying point for many investors to date. As an owner not only do you get to own a piece of paradise, but you also get to experience and use this resort and all its amenities yourself. For 14 days each year you are free to experience the crystal blue water, the resort spa and wellness centre, or adding a further layer of luxury to your trip – take advantage of the resort’s helipad and arrive in style with a helicopter service direct from Caticlan to the resort.
Are the yields realistic and how are the NET returns calculated?
Absolutely! Based on relatively conservative room rates and occupancy levels, that are far lower than local comparable resorts, yields are expected to be between 14.4% and 21.9%. So confident are the developers that they are underwriting the yield so you will obtain an assured minimum of 10% over the period whilst still benefiting from the upside when the resort performs.
If you’d like to know more about our beachfront Philippines resort, please call us on +44 207 993 8888 or email firstname.lastname@example.org
When assessing any exciting emerging market for its investment potential, the first question we ask is whether foreign non-residents are allowed to own property under a reliable legal framework. If the answer is ‘no’ there is little point in proceeding any further (though if it is ‘yes’ there are hundreds of further points to address). This question should also be front of mind for any investor.
However, the answer is usually a lot more complex than ‘yes’ or ‘no’, with infinite possible variations regarding who is allowed to purchase property, what they are permitted to own, how the process works, and when entry and exit may take place.
Part of the reason we have sought and identified investment opportunities in the Philippines, in addition to its astonishing economic growth and thriving tourism industry, is the stability of the legal framework around property ownership. The country has a history of encouraging foreign investment through the gradual relaxation of rules governing foreign ownership, dating back over fifty years.
A 1993 Investor’s Lease Act states that it is ‘the policy of the State to encourage foreign investments . . . Towards this end, the state hereby adopts a flexible and dynamic policy of the granting of long-term lease on private lands to foreign investors.’
Below, we set out the rudiments of foreign ownership in the Philippines.
Foreigners are entitled lease all kinds of property including private land for up to 50 years, with an initial 25-year period renewable once for a further 25 years. This means that foreigners can lease any kind of real estate, including houses, condominiums (which are owned though a specific form of title), and hotel units. This is provided for in Presidential Decree No. 471, written into law in 1974.
Foreign investors or multinational corporations are permitted to own condominium units outright under the Condominium Act (Republic Act No. 4726), which became law in 1966. This states that non-Filipinos can take full ownership of sub-divided units within larger buildings – almost always residential buildings, though condominium title can also apply to industrial or commercial properties. The primary condition is that more than 60% of the units in any building must be owned by Filipinos. As long as no more than 40% of units are owned by foreigners, any units that come up for sale can be sold to foreigners. If not, they may only be sold on to Filipinos.
Restrictions on Land Ownership
Although foreigners can lease land itself, the outright ownership of land is heavily regulated in the Philippines, and foreigners are not permitted to take ownership except in cases of hereditary succession. So while non-Filipinos can own or lease property, they may only ever lease the land on which property is built.
So, in short: foreign investors are allowed to own certain kinds of property and to lease nearly all kinds of property, but are not permitted to own the land on which their property is built. Condominium units can be fully owned, and any other buildings can be leased for 50 years.
There is no indication that the government plans any changes to the current suite of laws in the near future, but, as with many other Asian economies, the direction of travel is clearly to widen the scope of foreign ownership and increase the flexibility entitled to investors.
If you have any further questions about this, or any other aspect of investing overseas, don’t hesitate to get in touch.
The evolution of the UK property market over the last few years demands a re-think of where and how we should be investing in the buy-to-let sector. We believe that the best opportunities are now arising in undersupplied regional cities with staunch economies and ambitious regeneration plans. But we are often asked why that means holding off on the big cities that first spring to many investors’ minds: Manchester, Liverpool, Birmingham, and so on.
In fact, we’d never dismiss those places out of hand: they have made a lot of investors a lot of money in the past, and are bound to harbour a few great opportunities still. But there is a case to be made for approaching them with caution.
A matter of timing
With Brexit around the corner and price stagnation rippling out from London, capital growth can no longer be counted on as a matter of course across the UK. But more specifically, many of the big cities appear to be far advanced on their growth cycles, with rampant appreciation over the last five years beginning to peter out just as (or because) a gut of new supply is arriving on the market.
Manchester, for example, is projected to experience the highest city centre price growth across the North of England over the next five years, but at 4.2%, its projected annual growth rate is subdued by the standard of its recent performance (JLL).
Probably not coincidentally, Manchester also has more residential units currently under construction than were built in the last eleven years combined (11,135 compared with 10,870 delivered since the start of 2007), according to Deloitte’s 2018 Crane Survey.
(Housing supply on this scale is almost totally absent in less popular regional markets, many of which require large quantities of new stock and are not receiving it. The unaffordability of major cities is also likely to benefit demand in their commuter towns like Rochdale and Heywood, which are targeted for regeneration and serve investors well with low entry points.)
Of course, calling time on price appreciation is just as futile as predicting it will accelerate. But we can all agree it is not guaranteed, and any sensible investor will think of capital growth as a happy bonus rather than a prerequisite. So rental yield remains the crux of the matter, and the problem is that the strong recent growth cycle has compressed the excellent yields that have traditionally been these cities’ strong suit.
The most common yield quoted for off-plan investments in these places is 7% net – sometimes predicted and often assured. But that figure has remained more or less fixed throughout the current growth curve, and that is simply unrealistic.
In Manchester in 2017, house prices rose by 10%, and rents rose by 3% (JLL). Both are excellent rates of increase and very good news for investors who bought early in the present cycle. But for anyone looking to buy now, the holy grail of 7% net must be getting further and further out of reach.
If, simplistically, a £100,000 property generated a 7% yield of £7000 at the start of 2017, by 2018 an identical unit would cost £110,000 to buy and generate £7,210 in rental income – a 6.5% yield. JLL’s equivalent growth figures for 2016 were an even more impressive 15% (prices) and 6.9% (rents). So, a £100,000 property generating 7% in 2016 would now cost £126,500 to buy and bring in £7707.50 per year – a yield of 6.1%.
Though not always dropping by half a percentage point per year, as long as capital growth has been stronger than rental growth, yield compression will take effect. So advertised yields – whether 7% net or any other number magically staying constant over the years – require closer scrutiny. Many of them may be entirely justified, but investors must seek proof.
(One caveat is the fact that 3%+ rental growth will lift yields higher over time, but if an advertised yield is not justified, the period of fixed returns had better last a good long while for the actual yield to catch up in this way.)
However, there certainly are still ways to achieve high and sustainable yields in the UK’s major cities. One particular area in which they show considerable potential is in the serviced apartments sector. This booming industry tends to run counter-cyclical to movements in the national housing market, and has performed especially well with the devaluation of the pound making inbound travel more appealing.
An industry report released this week states that, although ‘corporate adoption has perhaps reached a temporary ceiling’ in demand, and supply has grown by 19% in just one year globally, 63.4% of operators still experienced higher occupancy rates in 2017 than 2016, and 39.21% did so with higher nightly rents (GSAIR 2018/19).
The UK is among the world’s most mature markets, boasting stable average occupancy of 81.7%, with nightly rates rising by 5.4% in 2017 (STR / ASAP). With figures like that, serviced apartments can be an extremely profitable alternative to buy-to-let in areas where yields are being squeezed. And big cities make by far the most sense on that model, as it requires a substantial demand stream from business and tourism.
Yet in similar tendencies are already beginning to creep into this sphere. Manchester’s large volume of new serviced units actually caused occupancy to decrease by 6.3% in 2017, although it was previously the city with the highest occupancy rate in the country and remains strong at 80.5% (STR/ASAP). Edinburgh, without a huge injection of new stock, saw occupancy stabilise at 84.4% and nightly rates rise by 7.3% in the year (STR/ASAP).
We don’t mean to pick on Manchester, but it is the clearest example of this trend in both the residential and serviced apartment sectors, with plenty of data reported, and also happens to enjoy an extremely favourable reputation among potential investors – which, again, should not be discounted, but could benefit from a little moderation.
The heaps of investment shovelled into Manchester, Birmingham, and their peers, have served those cities and investors extremely well, and their property markets have plenty of life in them yet. However, at this point in time it pays to question conventional wisdom. We are convinced that the reasons to pause before pouncing on mainstream investment locations can be avoided altogether in other, less obvious locations.
You may have heard that they heyday of buy-to-let investment is behind us, with margins now sinking in the wake of the tapering of mortgage interest tax relief and the volley of other measures introduced by the last Chancellor.
In fact, buy-to-let remains as profitable as ever: interest rates remain extremely low (despite last week’s marginal bank rate raise), previously-dormant regional markets are coming to life, and, as in any other model of supply and demand, the more landlords exit the game the better the conditions for those who do not.
This post will explore the impact of the present interest rate environment on buy-to-let investment. This is a key point that often gets forgotten in the admittedly vexing debate around the gradual reduction of tax relief for landlords.
What has changed?
To refresh: prior to April 2017 landlords could deduct all mortgage interest payments from their taxable income. After that date only 75% of the value of those payments was tax deductible, dropping to 50% in 2018, 25% in 2019, and finally to 20% from April 2020 onwards.
Landlords in high tax brackets with multiple properties financed at high loan-to-value ratios anticipate trouble, while basic rate taxpayers with smaller portfolios may not notice.
There is no question that this measure is bad news for the buy-to-let sector. However, the level of tax relief on mortgage interest is fundamentally less important than the actual interest rate available – and that has improved considerably over the last couple of years.
So, in effect, current conditions are far more favourable for new investors and those with variable rate mortgages.
How does this affect the numbers?
To quantify the differences, below are some worked examples that compare the situation for both low and high tax payers in 2012 (when mortgage interest was tax deductible but rates were high) with low and high tax payers in 2020 (when interest will only be deductible at the ongoing level of 20% but interest rates, if locked in today for a 3- or 5-year term, are much lower).
The tables below make the following assumptions:
– A hypothetical property costing £100,000, financed at 75% LTV and yielding 7.5% gross
– Allowable costs of £1,000 such as a ground rent and service charge – which are tax deductible
– Comparing the mid-2012 average fixed-rate, interest only buy-to-let mortgage of 5.09% (This Is Money) with a middle-of-the-road 5-year rate of 2.39% currently available with the Post Office (MoneyFacts)
– The yield for the 2020 scenarios also reflects the 3% stamp duty surcharge introduced in April 2016, which is added here to the purchase price
It is clear that today’s interest rates, even with the full reduction in tax relief and additional stamp duty that will apply in a few years’ time, allow leveraged investors to do far better than they did in 2012. For basic rate tax payers, incomes are 76% higher, and for top rate tax payers, they are 53% higher.
If we expect interest rates to remain low or climb back slowly, then present conditions offer a really strong buying opportunity despite the regulatory bad news. The average buy-to-let interest rate must rise to 5% in order for basic rate payer yields to fall below those of 2012, and it must rise to 3.7% for top rate payer yields to do so.
On a side note, these numbers also point to the increasing usefulness of investing in property through a limited company. This allows even high rate tax payers to access the highest returns of the four scenarios, since mortgage interest remains completely deductible for companies (in addition to a wealth of other benefits, which we have explained elsewherein this blog).
Investing in hotel rooms has been a feature of the UK property investment space since 2007, long enough for the model to become a trusted, mainstream asset class, but comparatively young by the standards of buy-to-let. It offers individuals the chance to access attractive commercial property returns, which are rarely available outside of institutions and funds, with very little input.
As such, the chief advantages of investing in hotels are low entry points, high yields, and a completely hands-off experience. On each of these metrics, hotel rooms are superior to buy-to-let investments:
They are cheaper because hotel rooms are effectively studio apartments, usually without kitchens and other expensive features. As commercial property, they are also highly tax-efficient. They do not incur stamp duty below the threshold of £150,000 – around twice the average price – nor is there any withholding tax for international investors. Hotel rooms are also sometimes eligible to be purchased through Self-Invested Personal Pension schemes, conferring additional tax advantages.
They are substantially higher-yielding because nightly rates at hotels are far higher than monthly residential rents, while administrative and cleaning costs are spread over a large number of rooms. In fact, income to investors is always net of running costs and there are rarely any additional charges, so the yield is almost always a final net amount. Net yields in excess of 8% or even 10% are among the best available in any kind of property investing.
Hotel rooms are hands-off because the management is an integral part of the product. In fact, these days the running of the hotel is so predictable in its inputs and outputs that most hotel room investment products offer fixed rates of return over fixed timeframes, so income to investors is entirely stable and predictable.
In many instances, the sole extent of investor involvement is a free annual stay at the hotel, as part of the free personal usage deals that are packaged with many investment products, taking the idea of a stress-free investment experience to a whole new level.
When an investor buys a hotel room, he or she leases back the space to the hotel operator, who then functions like a tenant. The only thing the investor needs to care about is that their tenant can pay the rent, and that is a function of the overall profitability of the hotel business: how well-run it is and the popularity of its location. So the most important role of the investor is choosing well at the beginning.
Choosing well means looking at the market where the hotel is located, using common sense to determine whether it will attract consistent and lasting demand from guests. City centres where business is conducted, beautiful natural locations where holidays are popular, proximity to particular event venues or tourist attractions, and so on, are sensible choices. Seasonality of demand is not a problem, as long as it is accounted for in the hotel’s business model, or if the high-seasons are sufficiently profitable to compensate for low-seasons.
Choosing well also means assessing the track record of the developer and operator. Do they operate other successful hotels, or work under a well-known national brand, for example? Even better if the developer is refurbishing an existing hotel with performance indicators that can be confidently improved upon. (In that case, the existence of a useable physical asset also supplies greater security of title for investors.)
Measuring success for hotels means looking at occupancy rates (the percentage of rooms occupied over a specific period) in relation to the average room rate charged to guests. Combining these two metrics gives the hotel’s Revenue per Available Room, or RevPAR – a measure of its overall profitability. Happily, most hotels require surprisingly low occupancy rates in order to turn a profit and supply investors with their income.
In many locations or regions of the country, investors can access statistics about the average performance of comparable hotels, which gives a good indication of the demand for the new hotel. (The only additional thing to look out for is supply: if there are five other hotels being built or refurbished in the immediate vicinity, they may well need to compete on price.)
While for some people a fixed rate of return over a specified time period is an advantage for financial planning, for others it limits their flexibility to do other things with that money.
Hotel rooms are not yet eligible for mortgage financing from most providers, so the input is entirely in cash. Although prices are significantly lower than for residential apartments, the actual cash amount required can be higher than the equivalent deposit a buy-to-let investor would put down on a unit.
The other main disadvantage of this asset class is a lack of flexibility for exiting the investment: while a house can be listed and sold at any time, there is no well-developed public marketplace for the buying and selling of hotel room investments. As a result, investors must arrange a secure exit strategy.
The best option is a contractually agreed buyback from the hotel developer, meaning that the developer is obliged to buy back the investor’s hotel room at a pre-agreed moment in time and at a pre-agreed price. Fairly typical would be a 5-10-year term in which an investor can request a buyback with a modest level of uplift, such as 2.5% appreciation per year.
The relatively low level of uplift is a further limitation to this form of investing: since appreciation is usually agreed in advance, investors will not benefit from roaring growth in the residential market. That the yield is significantly higher should compensate for this, but it is also a further measure of security because there is no risk that the value of the asset will decrease.
Hotel rooms: the verdict
Hotel room investing is the essence of certainty: predetermined yields, uplift, and timeframe. Just the opposite of the unlimited variation and flexibility offered by buy-to-let. It therefore suits an entirely different kind of investor or investment strategy.
Hotel rooms are ideal for people who want fixed income over a specific term but are not able or do not wish to get a mortgage, such as near-retirees. They are great for those who value regular income with minimal effort above equity growth. And they are an excellent choice for those already heavily involved in the buy-to-let sector in search of diversification.
The point about diversification is particularly clear at this moment in time – Brexit has provided a perfect example of how hotels can be counter-cyclical to the residential market. As house price growth in many areas has slowed as a result of political certainty, the lower value of the pound is bringing more foreign tourists and staycationers to the UK’s hotels. Domestic holiday trips and expenditures increased by 6% last year, while international visits rose by 7% and expenditure by a whopping 11% (Visit Britain). As a result, UK RevPAR growth is projected to continue at an annual rate of 2.3% this year (PwC).
Investors who choose to take advantage of the different benefits offered by both asset classes together are not only achieving a more equal balance between income and growth, they are also bolstering their financial security in the face of most externalities.
Our recent blog explored how buy-to-let still offers excellent returns on capital invested, particularly in today’s favourable interest rate environment, and in spite of recent changes to mortgage interest tax relief.
Yet many investors are taking the somewhat dour mood in the buy-to-let sphere as an opportunity to consider their alternative options – a wise course no-matter your view on the UK investment climate. For those investors, and for others seeking a sensible dose of diversification for their residential-dominated portfolios, hotel rooms present a strong – and completely different – case.
Here we review the basics of buy-to-let and hotel room investing, and compare the benefits afforded by each.
Residential property is as safe as houses: an extremely stable, immovable asset with demonstrable profitability since records began. In the Federal Reserve Bank of San Francisco’s 2015 study of The Rate of Return on Everything, looking back from 1870 to the present day, property offered average annual inflation-adjusted returns of 7.05% – the highest return of all the asset classes measured.
In the UK, residential property is particularly lucrative owing to the immense shortage of supply, with the shortfall estimated to be widening by a further 150,000 units every year (Gov.uk). Its record for capital growth is impressive, with the average property appreciating by 224% over the last twenty years (Land Registry to May 2018). Yet capital growth is considered a happy bonus, with rental returns forming the substantial and dependable element of this investment class.
Rental yields for residential tend to be lower than for hotel rooms, student accommodation, and alternative asset classes within the property space, but the potential for capital growth is unquestionably higher because the market to sell is so liquid and homes are always in demand (that does not mean, of course, that prices do not go down as well as up).
Another key advantage of buy-to-let is the ability to leverage the investment. Because the market for buying and selling homes is so well-established, so is the market for mortgage financing – meaning that few investors struggle to obtain it. Typically, you can borrow up to 75% of the value of the asset, so that your return on capital employed (the income received, after deducting mortgage interest, expressed as a percentage of the amount of actual cash paid) can be very high.
For example, with a pot of £100,000, many investors elect to purchase four properties, depositing £25,000 in each, and letting the rental income pay off the mortgage debt, rather than buying one in cash. If each property cost £100,000 and produced £7,000 in gross rental income, the percentage return on capital by leveraging four properties at a 3% interest rate would be 19%, as opposed to 7% for buying a single property in cash. With today’s interest rates sitting comfortably below 2.5% for a buy-to-let purchase, the benefit of gearing is particularly attractive.
So buy-to-let offers potentially limitless returns with the security of owning a useable physical asset, and the flexibility to sell it at any point. But it also has some drawbacks.
There is a comparatively large degree of strategy involved in buy-to-let, with important decisions including whether to invest in new build or existing stock, HMOs, houses, or flats, where to buy, when to enter the market, and when to exit. This makes it slightly more hands-on than fixed investment products like hotel rooms, with their defined timeframes and minimal variation, but tenant-finding and day-to-day management can be as hands-off as an investor wishes, with various management options offered for a fee by lettings agents.
The market at the moment is characterised by prices that are rising, or have risen, faster than rents, meaning that yields are compressed in many of the obvious locations investors might wish to buy – like London, for example, with central Manchester and Birmingham appearing to be going the same way. So there is a need to look harder, beyond the old favourites, to achieve strong yields. Many investors find this exciting, but it is undeniable that the buy-to-let landscape doesn’t offer easy money the way it used to.
That is also a result of a string of regulations introduced by the previous government line-up, which attempted to free up the housing market for those who wish to buy, by disincentivising the purchase of second properties and investments. An additional 3% stamp duty tax, and the reduction of the ability to deduce mortgage interest costs from taxable income, are the main examples of this.
Buy-to-let: the verdict
The environment has become slightly more challenging of late, but none of these changes cannot be overcome with thorough research and smart decision-making. Moreover, the alternatives to property (for example FTSE stocks and shares) have become no more compelling in the meantime.
So buy-to-let remains an excellent choice for people with access to financing, who are looking for long-term growth or a nest egg in addition to ongoing income, and want the flexibility to have ongoing involvement or to pull their money out at any time. It is an established model in a stable market, with plenty of available information.
However, diversification is a central plank of investing and attractive new products are appearing all the time, so it is advisable for investors to look beyond the tried-and-true buy-to-let model. One of the more prominent alternatives is hotel room investing.