Most investors know that property is a key component of any sensible investment portfolio. UK property has been an effective and robust way to store value, generate income and protect against inflation due to long term factors that keep demand high and constrain supply. These include population growth, limited land for building and tight planning regulations. It’s also allied to a robust and well-organised legal system, which has developed over hundreds of years.

In this series, we’re exploring the four ways you can gain exposure to the UK property market. We’ll weigh up and pros and cons of each type of property investment, so you can make an informed decision as to how you can incorporate this asset class into your investment portfolio

Invest via peer to peer lending

Peer to peer lending allows you to lend your money directly to individuals or businesses using an online platform as the middleman. Where property is concerned, these loans are made to property developers almost exclusively. It’s important to recognise up front that this does not give you exposure to property equity; instead, you are lending against property as an asset class.

There are a large number of companies now offering P2P property-backed lending opportunities directly to investors online. This segment has grown significantly following the withdrawal of the banks from risker property lending following the financial crash of 2008. The loans are split broadly into two camps, bridge lending and development lending.

Bridge lending is short-term lending to “bridge” the gap between other types of finance or ownership of the asset. The most common reasons for bridge lending are for the initial purchase of land or property prior to developing it, or refinancing a completed development prior to selling it. Bridge loans typically last 6-24 months. Development lending is the provision of a loan to a property developer for the purpose of undertaking development of a property, for example a new build or change of use. Development lending will finance the actual construction costs.

With peer to peer property lending, you are assuming the final value of the property will be sufficient to pay your loan capital back, together with interest. You are not exposed to the change in value of the underlying asset, unless it drops below the value of the loan, in which case your returns may be reduced or eliminated completely.

In many cases, unless you as the investor undertake substantial due diligence on the individual projects, you are relying entirely on the judgement of the developer and the team working for the platform as to whether the property is likely to pay back your investment plus interest. It’s essential that you do your research on the P2P platform you decide to invest with.

Interest rates on P2P property loans can be impressive: between 4% to 12% depending on the risk profile. First charge loans, which are paid back first, are generally lower-risk and offer a lower rate of return. Second charge loans, paid back after first charge loans, are riskier (for example, if the property is sold for less than forecast there may not be enough capital to cover the second charge loan), but are rewarded with a higher rate of return. Companies such as Lendinvest and Landbay specialise in providing these loan opportunities.

A final advantage of P2P lending is that some providers allow you to invest via an innovative finance ISA, making any interest on that money tax-free.
 

Perhaps the most well-known way to invest in property is buy-to-let: you own a property outright and become a landlord, collecting rent from your tenants. You manage the property to ensure that your yearly takings exceed the cost of owning the property, earning you a profit.