The British have a long-standing love affair with residential property. This extends beyond owning their own homes to a faith in bricks and mortar as a solid investment.
However, while investing in residential has meant owning one or more buy-to-let properties, the impending crackdown on buy to let by the chancellor means they should consider an alternative that offers them comparable returns with much less hassle.
It was confirmed in yesterday’s Budget that three per cent additional stamp duty on BTL properties would be imposed from this April, in line with the announcement in the autumn statement. As such, the stamp duty on buying a £250,000 BTL property will rise from £2,500 to £10,000, while that for a £400,000 asset will more than double from £10,000 to £22,000.
But it will get worse: from next April, the tax relief that BTL owners could claim on their financing costs such as interest payments on mortgages and loans to buy furnishings will be gradually reduced over four years.
This clampdown on BTL investors, prompted by a growing imbalance in home ownership, boosts the attractiveness of investing in residential via property funds rather than direct ownership.
There are a number of reasons for this. First, apart from the onerous cost of the stamp duty, the removal of tax relief on finance costs means it will no longer be advantageous for them to borrow money to invest in properties. Companies (including funds) that invest in BTL do not have this compromise because it is perfectly reasonable from them to offset expenses against income.
Second, while individuals cannot take advantage of tax exemptions and reliefs by putting BTL assets into pension schemes or Isas, they can do so with investments in property funds.
Third, a property fund offers diversification: the biggest dent in returns is caused by voids, or empty properties. But in a portfolio of 50 or 60 properties, if one of them has no tenants then this has a minimal impact on the overall rental income.
Fourth, and most important of all from a quality of life perspective, the property fund route means investors can leave all of the hassle of administration and maintenance to someone else. Economies of scale also mean that the cost of maintenance has proportionately less impact on total returns.
Overall, the main driver for individuals to invest in property is the long term capital growth and the income that BTL property generates.
But given all the associated costs and the chancellor’s new penalties, it is unlikely that private investors could easily achieve a reliable net income of five per cent per annum plus capital growth, which is a reasonable target for many of the residential property funds now available to them.