The buy-to-let boom of recent years has fed the stereotype that Brits are uniquely obsessed with property. Yet statistically this appears to be little more than a myth.
The latest data from Eurostat show that 64.8 per cent of the UK adult population lives in a property they own compared to an EU average of 70.1 per cent. Only the Germans and Danes are less likely to be owner-occupiers. Furthermore, just 17.1 per cent of people lived in market rental properties in 2014, again well below the EU average (the UK has a larger proportion in social and council housing).
The popularity of buy-to-let has been as much down to its financial attractions and the failings of the pensions industry as anything peculiar about the British psyche. On the one hand, house prices have soared 47,000 per cent over the past 90 years against a rise of 5,413 per cent in the cost of living, offering vast capital gains to those lucky enough to own. On the other, says Brewin Dolphin’s Rob Burgeman, “it’s a damning indictment of the industry that people have had so little faith in pensions that they’ve got properties instead.”
But it looks like buy-to-let has had its day. A combination of action by George Osborne on stamp duty and tax relief and mortgage eligibility changes by Mark Carney has led to a perfect storm for buy-to-let investors. According to Michael Ball of Reading University, basic rate landlords are likely to see a 10 per cent fall in aggregate returns, while higher rate taxpayers will see returns drop by 30 to 40 per cent.
Is it all over?
Is it all over for buy-to-let? According to Tony Mudd of St James’s Place, probably not. “I think investors’ love of property will survive this,” he says. “I’m sure it might put people off, but there are still reasonable returns to be made of 4 to 5 per cent.” Those buying a property without a mortgage, for example, will not be affected by restrictions on how much interest can be deducted from their tax bill. But Burgeman thinks otherwise. “The days of having 10 properties on 90 per cent interest-only mortgages are going fast.”
Yet even if directly owning a buy-to-let property is becoming less attractive, residential property remains appealing. Capital values are likely to keep on rising, as there is no sign that enough houses will be built to meet demand.
A number of funds and companies are available for investors looking to get exposure. Grainger, which owns, rents and manages residential properties, is one, though Burgeman warns that comparing such investments to buy-to-let is “not comparing apples with apples”.
In addition, a growing number of property tech companies are developing new ways of gaining exposure to buy-to-let.
Taking a stake
“We started Property Partner in January last year with one property in Croydon. Now we have more than 180 handpicked properties across the country, allowing investors to spread their risk by diversifying their portfolio.” Founder Dan Gandesha’s crowdfunding platform is one of this new breed. It enables investors to take a stake in individual rental properties.
You get monthly rental payments net of costs in return, alongside any capital growth (you can sell your stake either on Property Partner’s secondary market, or after five years at fair market value). The investments are picked by Property Partner, and each property listed on its platform sits within its own limited company.
The benefits compared to traditional buy-to-let are several. First, you don’t take on any of the hassle of managing the property. Second, you can get exposure for as little as £50. Finally, there could be relative tax benefits. While properties bought through Property Partner are still liable for the new 3 per cent stamp duty surcharge, returns are classed as dividends, meaning that you can use the new £5,000 annual tax-free dividend allowance. And while the chancellor has excluded buy-to-let from new, lower capital gains tax rates, as these investments are structured within a company, you won’t miss out on those.
Debt over equity
LendInvest offers another alternative, side-stepping all the recent tax changes completely. Rather than taking a stake in individual properties, it facilitates buy-to-let mortgage loans and bridging loans. “We lend money generally to professional borrowers,” says its chief executive Christian Faes. “We think debt is the best investment – you don’t have tax issues.”
With an average loan size of £545,500 and an average return of 7.22 per cent, the benefits, says Faes, are that you can diversify across a number of properties, you receive a fixed rate for the duration of the loan, and all loans are secured against properties, meaning that your money should be protected should the borrower default. After FCA authorisation, LendInvest will also be available within the Isa wrapper.
Keep your head
Not all are sold on the alternatives. “I really can’t say I’m a fan. If the market takes a downturn, then these peripheral plays aren’t going to end well,” says Burgeman. “Generally it’s people trying to get exposure when they can’t really afford to get exposure that get in trouble.”
But when the chancellor and the governor of the Bank of England are seemingly united in their determination to crack down on non-professional landlords, you can’t blame investors for looking for alternatives.