Residential Property: Past, present, future
The UK’s love affair with owning property is a well-documented phenomenon – and it’s clear why. Property owners have enjoyed sustained growth for decades, with the 2 million people fortunate enough to call themselves landlords, enjoying a meaningful monthly income, which keeps pace with inflation. The surprising fact is that fewer than one in ten UK households include a buy-to-let investor. The majority of investors are missing out, and it’s not all to do with affordability.
ONS data on UK house prices and private rents shows that buy-to-let landlords have achieved an average annual total return of more than 10% over the past 20 years when measuring both value growth and net rental income, i.e. after deductions for operating costs, maintenance and voids.
2016 saw UK residential property prices stand resolute against a tide of political and economic uncertainty, in spite of wider market volatility and a stepped reduction in the value of sterling. Yet, while an ever increasing proportion of the UK population recognise the value of residential property investment, accessing the asset class and generating a profit is becoming increasingly difficult, leaving the 90%+ of households who don’t already own a buy-to-let scratching their heads over how to achieve the investment they desire.
How significant is residential property investment?
The vast majority of UK household wealth is held in a few core asset classes; cash savings, residential property and equities (company stocks and shares). Pensions remain a significant element of the average private portfolio, with institutional funds allocating the majority of capital to equities, bonds and “alternatives” (including commercial property).
The left hand chart shows the split of household wealth across the principal asset classes. The right hand chart shows the percentage allocation to major asset classes, including those held within pensions.
Figure 1.
Total household investment in core assets sits at £5.2 trillion, excluding the value of capital held in owner occupied homes. Owner occupied homes are not typically considered an investment given that they provide a necessary dwelling place, rather than funds which can be invested freely with a view to increasing wealth and/or earning income.
The search for income
Against a backdrop of long term, ultra-low interest rates, the household investor’s search for income has long since taken them outside of the traditional comfort zone of savings deposits and government bonds. Even accounting for legacy fixed rate deals and conditional bonuses, cash deposits are only returning 1.1% per year, a number which will reduce as the impact of the base rate reduction to 0.25% bites.
By contrast UK residential property yields 3.5% per annum after operating costs and voids, exceeding dividends earned on shares listed on the London Stock exchange with far lower levels of volatility to asset values.
Conclusions: Greater than 90% of UK households have no exposure to residential investment property
With a total value of £6.2 trillion, the housing market is the single largest asset class in the UK and the private rented element of this has come to represent a critical element of the UK household investment portfolio. Approximately 2 million private investors throughout the country are relying on residential property to preserve and grow their wealth, while earning increasingly important income as returns on savings creep closer to zero. Yet that represents fewer than one in 10 households including a buy-to-let landlord. Despite the significant amount of investment into residential investment property, the fact remains that most investors are missing out on this asset class.
Accessing direct property investment has become tougher than ever: high initial capital requirements, a shortage of supply, additional stamp duty, tightening buy-to-let mortgage criteria and the impending reduction of mortgage interest relief are all barriers in the face of those hoping to enter the market. However, there is an alternative to traditional outright ownership.
Property Partner is a technology backed property investment and trading platform, enabling investors to own and trade high quality UK residential property at the click of a button. All the assets are held in individual UK LTD Special Purpose Vehicles (SPVs) with the investor’s ownership taking the form of shares, providing exposure to a diversified portfolio of properties hand-picked by experts. A monthly dividend is earned from the rental income, with shares tradable on a unique secondary market, bringing liquidity to a traditionally illiquid asset class.
The average dividend yield across recent new listing properties is over 3.75%, with an average annualised total return of 7%* across the £60m of assets acquired across the UK through the platform since its launch in January 2015.
For those who take this asset class seriously, the barriers to investment are now removed. Age old problems of diversification, time to manage and lack of liquidity are solved, and the future for UK property investment is suddenly more interesting than it has ever been before.