Unemployment, increasing national debt, and decreasing productivity; these are just some of the threats that many of the world’s most advanced economies are now facing. And with all of this going on, it is hard to imagine any other outcome than a global recession. In fact, the signs are there that it’s already happening, and the outlook for what’s to come is even worse:
In the stark words of UK Chancellor Rishi Sunak: “I’ve said before that hard times were ahead, and today’s figures confirm that hard times are here.”
Previously, and in such uncertain times, property was typically seen as a ‘safe haven’ for investors, for varying reasons. So whilst the most recent events will certainly have some short-term effects on the market, the fundamentals that make property a good investment are still there. I’m sure that by now we are all familiar with the upwards trend of UK house values over time:
However, the problem remains that direct investment in property is both time and capital intensive. But why is this the case? Well, there’s the upfront transaction costs and deposits which can reach up to 25% of the property value. Ongoing upkeep, management, as well as having to deal with tenants, agents, and of course those dreaded void periods that eat away at profits. And the recent changes to landlord tax structure have only rubbed more salt into the wound. Yes, it’s easy to see why traditional buy-to-let investing is far from a ‘hands-off’ experience.
For many investors then, the perceived headache of actually owning property far outweighs the benefits, and this is especially true if you want more of hands-off property investment.
But, what if we told you that there are many ways to invest in property without these associated pain-points? This segment of the market has come so far that really, in 2020, there are so many ways you can invest in property without actually buying a house. Here are just 5 of them!
A Real Estate Investment Trust, or REIT, is a type of fund that uses investors’ cash to purchase and manage property portfolios. When investing in REITs, you do not own the properties directly but rather buy shares in the REIT itself. REITs have several advantages over the typical buy-to-rent option. Namely, they are exempt from capital gains tax on their properties, meaning they can generate more tax-efficient returns for you as the investor.
By choosing REITs over a typical buy-to-let option, you also become exempt from many of the recent regulation and tax changes (e.g. increases in stamp duty, George Osborne’s 2017 tax raid, etc.) that have been introduced to dampen the buy-to-let market.
REITs do of course still have some pitfalls. Namely, the dividends you receive are subjected to higher rates of tax than the normal 15% that most dividends are currently taxed at. This is because a large chunk of REITs dividends is considered ‘ordinary income’, which is usually taxed at a higher rate. Additionally, REITs are sensitive to demand other high-yield assets. For example, rising interest rates could make Treasury securities more attractive, drawing funds away from REITs and lowering their share prices. Add to this a lack of control over big decisions and the fact that little information is made available to the investor, and it’s easy to see why REITs are not everybody’s first choice.
Crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people. The concept has gained notoriety as it has effectively lowered the barriers to entry for the typical investor. It also offers a somewhat ‘hands-off’ approach to property investing, with many crowdfunding platforms doing a lot of the legwork and management jobs for you. In contrast to a REIT scheme, crowdfunding offers greater transparency as investors have access to all necessary information as well as some influence and choice over investment decisions.
Crowdfunding initiatives are not without their drawbacks, however. Unlike REITs which pay their members, participation in a property crowdfunding project does not give you any dividends. Additionally, there is a “lock-in” period involved when waiting for a loan to mature or for the sale of the property to go through – it can be anywhere from 6 months to 10 years! Many crowdfunding platforms can also hit you with hidden fees – platform fees, construction fees, management fees, and more. Make sure you do your due diligence beforehand as these fees can often undermine the returns on your initial investment.
Peer to peer (P2P) lending has grown significantly in the wake of the 2008 financial crash as many major banks have since moved away from riskier property lending.
to “bridge” the gap between other types of finance, e.g. for the purchase of land or property prior to developing it. Development Lending, on the other hand, is a loan to a property developer for the sole purpose of developing the actual property, i.e. for financing the actual construction costs.
P2P investing is certainly not the safest form of property investing – you are ultimately relying on the judgement of the developer as to whether the project will stay on track and end up paying out what was initially promised. Because of this risk, interest rates on P2P property loans are enticing: often between 4-12%. Bear in mind, however, there are a lot of things that can go wrong in the time between your initial investment and completion of the project. Take COVID as one example!
Perhaps the most popular of these new methods for indirect investment are Property Bonds and Property Funds. Property Bonds are essentially corporate bonds that are explicitly issued by property developers. They give investors a share of individual properties and portfolios whilst offering greater transparency and liquidity. When purchasing bonds, the investor is effectively offering their capital for a fixed term (usually 3-5 years). This capital is then used for the construction and delivery of the project. Quarterly or yearly returns are then given to investors. Depending on the type of bond you purchased, this can be as much as 12%! At the end of the fixed term, the investor will get back their initial investment along with the total return.
As with any investment, property bonds do have risks. Recessions and other economic shocks can always throw up the possibility of a borrower not delivering the scheme as promised. But crucially, unlike many other forms of property investment, investors’ capital is often safeguarded through a registered charge. This will be secured against the property and also visible on Land Registry records.
Property funds are similar to property bonds but the investor owns equity in the property developer’s company rather than just a loan against the asset. They have the potential for higher returns than bonds but also involve a higher level of risk – with a fund, if the developer doesn’t make a profit, then neither do you. Some funds try to mitigate this risk by offering a coupon (or fixed return) on the initial investment, in addition to a share of the profits generated by the project – it really does depend on the type of fund you are investing in. We’d always recommend doing your due diligence beforehand so you know exactly what your specific agreement is.
New technologies, tools and platforms have made indirect property investment a lot more accessible for the typical investor. Using these above methods will ensure you get all the benefits of investing in property without any of the usual headaches, allowing you to incorporate property into your portfolio just like you would with stocks and shares.
It is important to remember, however, that there is no such thing as a ‘risk-free’ investment. And usually the higher the returns, the higher the risk. Therefore if you are looking for property to help shore up a risky investment portfolio, we would always advise using a method that gives you an option to safeguard your investment through a registered charge.
If COVID has taught us anything in recent months, it’s sure that you can’t take anything for granted in the investment world – and that the next big macro-economic shock could always be just around the corner!