Opinion: Residential property investment made easy
- Credit: Getty Images/iStockphoto
Britons’ love affair with property shows no sign of abating. Residential property values have soared thanks to an extended Stamp Duty holiday and initiatives such as Help to Buy, while Buy-to-Let (BTL) properties are snapped up in a buying frenzy reminiscent of the mid-1980s.
A drive around town – any town – confirms the point. The number of homes proudly displaying ‘sold’ signs, even those situated in less than salubrious locales, outnumber their ‘for sale’ counterparts by at least twenty-to-one. Meanwhile, estate agencies are buzzing as prices soar with more than 98% of buyers reportedly prepared to pay asking prices to secure their preferred property. The days of hard-nosed negotiation appear suspended, temporarily at least.
A large part of property’s perennial appeal lies in its ability to appreciate in value almost unnoticed. Figures published by the Nationwide Building Society show that a decade ago the average UK house cost £162,379; today, the figure is £231,644, a rise of almost £70,000, or 42.6%. Interestingly, in only two of the intervening 40 quarterly periods have prices risen by double figures; average values have actually tumbled in three different quarters.
Most of us don’t consider our homes to be investments, but we’re mightily pleased to know that over the longer-term, they tend to appreciate more rapidly than inflation or wages. Twenty years ago, for example, the average house cost £92,533 which means that over the intervening two decades, they’ve risen by a shade over 150%.
Such capital appreciation ultimately provides great comfort to homeowners and makes paying the mortgage more palatable, but it also explains why buy-to-let investors rave over property, even though the buying, management and maintenance process is undeniably more expensive than acquiring an ‘average’ home.
In addition to unavoidable costs including legal fees, mortgage arrangement costs and refurbishment expenses, the investor must add Stamp Duty (there are no exemptions for landlords); furnishing costs, inspection expenses to ensure gas and electricity connections are safe and, in many cities, registration fees payable to the local council.
On top of this, tax relief on mortgage interest was fully phased out from last month which means the only allowable expense BTL investors can set against property income is a fixed £1,000. Owners may wish to manage the property themselves, but this can be extremely time-consuming and appointing a managing agent adds further cost.
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Finally, although just about everything flies off the shelf during a buoyant market, it’s worth remembering that property, investment or otherwise, can be a notoriously illiquid asset; boom periods can be frustratingly short-lived.
It may appear that investing in residential property is simply too expensive; too much of a hassle to bother, although taking such an approach would ignore the benefits of capital appreciation.
However, there is another way in which to invest in residential property, presenting investors with an opportunity to achieve longer-term capital appreciation.
This particular option involves buying shares in a ‘pure’ residential property company which operates as a large scale landlord. There are very few of these.
The PRS REIT is the first listed investment trust which has built (and continues to build) a portfolio of family homes exclusively for the private rental market. The company’s shares currently yield 4.2%.
The concept of managing properties professionally and providing residents with a more inclusive rental experience (access to well-maintained community halls and gardens, on-site gyms and play areas etc) was first developed in the USA around 30 years ago. It’s a blueprint PRS are following here, helping to foster a sense of community by also organising events for residents.
The extent of the company’s involvement with its tenants goes a long way to explaining impressive levels of occupancy and rent collection across all of its sites. Rent collection in in the final quarter of 2020 was 99%.
Demand for rented family homes remains buoyant; PRS note that around 25% of households now live in the rented sector. This percentage appears unlikely to fall as factors driving demand include population growth, deposit affordability constraints, house price inflation and supply problems in the traditional buy-to-let sector: in short, there are too many flats and not enough houses.
Over time, the company’s share price growth is likely to be determined by a mixture of capital appreciation on its property portfolio and the return it distributes to shareholders. This anticipated growth may not be as rapid or as significant as that enjoyed by homeowners and BTL investors, but you could buy shares in PRS tomorrow, effectively gaining immediate access to the UK’s booming residential property market.
THE WEEK IN NUMBERS
- £500 million - Danish company Hempel, founded in Copenhagen in 1915, has snapped up British paint maker Farrow and Ball for £500 million. The increase in WFH during the pandemic has apparently fuelled demand for interior design changes. We trust the PM’s penchant for fancy wallpaper will be unaffected.
- 19,000 - There’ll be less WFH from June 21 for JP Morgan’s 19,000 British workers. The American bank told its employees earlier this week that they must prepare for a return to the office once restrictions are lifted.
- £32 billion - Opponents of HS2 were delighted to note that the Queens Speech omitted any reference to the development of the project’s ‘Phase 2b’ designed to create an eastern link between Leeds and London at a projected cost of £32bn. Part of the reason for opponents’ joy was the guarantee that the project would end up costing north of £50bn.
ONLINE: Why move? How to reinvest in your home
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