Volatile equities markets and economic uncertainty have prompted investors to search for more stable forms of investment including property. Their default choice of buy-to-let has become less attractive.
For investors the current volatile economic environment has made the trade-off between risk and return significantly more challenging than in the past few years. What had been reasonably benign global equities markets, turned volatile once again last year. Stocks ricocheted from record highs to post their biggest fall since 2008 – with the FTSE-100 ending down 12.5% at the end of December 2018. And while stocks have recovered almost all of these losses in the first quarter, many investors are understandably wary. In such a climate, it’s not surprising that investors are turning to asset classes that might be considered somewhat more stable such as property. There are several ways to do so but the most popular until recently, buy-to-let, is expensive and a number of tax changes have made it a far less attractive option than it once was. Property bonds and Real Estate Investment Trusts (REIT) are also popular forms of investment offering a steady income and reasonable yields. But growing in popularity are P2P lending platforms. Less costly than buy-to-let investment and usually offering more attractive returns than property bonds and REITS, P2P property platforms provide the perfect entry into bricks and mortar investing.
Buy to let under pressure
For the past twenty years buy-to-let investing has perhaps been the property investment of choice. But landlords are now being squeezed as never before. The additional 3% stamp duty surcharge on buy-to-let properties introduced in 2016 has made investing in a property portfolio significantly more expensive. Meanwhile, tighter lending restrictions ushered in by the Prudential Regulation Authority (PRA) at the start of 2017 has had a significant impact on buy-to-let lending volumes. And the new tax tear saw another tranche of mortgage interest tax relief disappear, driving up costs up once more for buy-to-let investors [1]. All of this has led to an 80% fall in new lending on buy-to-let properties in two years from £25bn to just £5bn. Landlords are now buying fewer homes than at any time in the past nine years, with the number of buy-to let purchases declining 15% year-on-year in 2018. In 2011, one in five houses were purchased by buy-to-let investors. Fast forward eight years and this figure has halved to 1 in 10. This decline is set to be a long term trend with a total of 360,000 fewer buy-to-let mortgages being advanced by 2023 [2]. Diminishing returns have not only led landlords to exit the buy-to-let sector but have scared off potential future investors who have instead begun to look to alternative property investment options.
REITS not as safe as houses anymore
Of the alternatives available REITS which provide a largely reliable income from rents paid to commercial property owners from tenants signed up to long term leases of 20 years or more and income increasing from interest payments on the financing of those properties. REITS are required to distribute at least 90% of their taxable income to shareholders annually in the form of dividends, producing a steady income through varying market conditions [3]. But performance is key to the value of those dividends based as it is on the share price of the REIT. One trade-off is relatively low yields. British Land, one of the higher-yielding REITS offers dividend yields of 5.16%, against a market average of 3.8% [4]. Investors should keep a close eye on the level of debt in a REIT. Leveraging debt prevents a REIT from calling on investors for more funds and diluting its share price. It is measured in relation to the Net Asset Value (NAV) of the overall property portfolio. But REITs can quickly become over-leveraged in an economic downturn as property values fall, increasing the loan to value of their debts relative to the NAV of the portfolio, ultimately harming its ability to service or repay debt and continue to provide returns for investors [5].
Property bonds more suitable for HNWs
Property bonds offer a way for investors to profit from the early stages of a building development. Investors offer their capital as a loan to the development company in exchange for a fixed rate of interest over a set period of time. Yields can range from 6.5% into double figures. Understandably, the higher the yield offered, the higher the degree of risk associated with the investment. Property investors do have a layer of protection as once the bonds are issued, they are secured against the property [6]. A legal charge can also be applied, which reduces the risk to the investor ensuring their capital will be repaid even if there is a default. But investors should do their research to ensure the company offering the property bond has a track record of success. Moreover, property bonds are usually tailored towards high net worth individuals with an annual income exceeding £100 0000 or sophisticated investors. Such bonds are also not regulated by the Financial Conduct Authority.
Property P2P lending increasingly popular
Property-backed P2P lending has become increasingly popular with investors because loans are secured against bricks and mortar, reducing risk of capital loss, while offering healthy returns of between 7% and 12%. There are two main ways to invest in property through a P2P lender. The first, property crowdfunding gives investors a fractional share of a property along with others over a lengthy period of time. But it suffers from the same problems as buy-to-let investments as a result of recent tax changes. The second, which is the model we operate at BLEND Network, sees a P2P property lender advance money to property developers to build their projects.
Historically, property developers concentrating on prime, city-centre locations and buy-to-let portfolios have been the focus of P2P lenders, but these areas, in our opinion, should largely be avoided given the overvaluation of the former and the tax changes that have had a negative impact on the latter. We prefer backing small builders of low-cost, accessible housing in the regions outside London and the South East where we believe there is greater value to be realised.
Investors can start with relatively small amounts – as little as £1,000 – which makes P2P property lending a good entry point for less experienced investors than some other options. Another notable advantage of P2P property investment is that it can be held in a tax wrapper such as a Self-Invested Personal Pension (SIPP), Small Self-Administered Scheme (SSAS) or the new Innovative Finance ISA (IFISA).
As an entry point into property investment P2P property lenders can offer robust fixed yields, backed by physical property assets. With due diligence undertaken by the P2P platform and available to potential investors, loans are likely to be advanced to low risk borrowers that have credible plans for their properties while at the same time offering investors greater liquidity and more attractive returns than may be found in traditional property investments. That said, we always advise investors to do their own due diligence.
Stay tuned and keep an eye on www.blendnetwork.com for more deals to come in very soon.
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