It is possible to generate returns from UK property, without putting money directly into bricks-and-mortar
There’s no doubting the viability of buy-to-let as a long-term option. The private rental sector accounts for a fifth of all households in the UK, playing a crucial role in the housing market.
Demand is still outstripping supply, with an average 99 new tenants registered with each letting agent in June, and nine new applicants chasing each available property, according to Propertymark. Rent is up too, having increased 8.6% in the 12 months to July 2024, according to the Office for National Statistics.
The fundamentals of buy-to-let are robust but it’s not without its challenges and landlords have faced a slew of them over the last decade. Combined with high mortgage rates, it’s led many to take some time out, rather than building their portfolios.
But they could still benefit from UK property market growth by investing in property-linked portfolios, through working with asset managers who specialise in the sector.
Has the Buy-To-Let Bubble Burst?
The short answer is no, despite some headlines sounding the death knell for the sector.
Behind the spin is a market that remains strong despite regulatory changes, tax hikes and new lending rules that have combined to make buying a property to let certainly more difficult and arguably less profitable for investors.
We’ve seen the professionalisation of the market over the last decade, as many so-called ‘amateur’ and ‘accidental’ landlords have exited. At the same time, portfolio and limited company landlords have moved into niche sub-sectors of the market, such as HMOs and holiday lets, in search of higher yields.
The long-term future of the sector is secure for those landlords willing to jump through regulatory hoops and stay invested for the long term.
But in 2023, the value of new buy-to-let purchase lending slumped by 53% and there’s clear reluctance among landlords to grow their portfolio. This is due to:
- The higher cost of borrowing – the Bank of England’s base rate increases have led to higher mortgage rates, squeezing margins for many landlords and impacting mortgage eligibility.
- Tighter lending criteria – mortgage stress tests, maximum LTV ratios and minimum rental coverage (Interest Cover Ratios) make it hard for some landlords to get the numbers to stack up.
- Tax changes – the removal of Mortgage Interest Tax Relief left many higher rate taxpayer landlords worse off, while the 3% stamp duty surcharge on second and further properties made it more expensive to enter the sector or expand a rental portfolio.
- Looming regulations – there’s more red tape coming down the line for landlords, with the Labour government’s Renter’s Right Bill, including the banning of no-fault evictions among other changes, and proposals for minimum C-rated Energy Performance Certificates on rental properties by 2030.
The combined effect of these changes has prompted many landlords to press pause on further purchases. But there are other ways they can create wealth from the UK property market, including:
- Directly buying shares in property companies
- Real estate investment trusts (REITs)
- Investment funds and unit trusts
- Open-ended investment companies (OEICS)
- Fixed income bonds
Some of these options enable investors to spread their risk by pooling funds with others and investing in a broad range of property assets. These are usually within an agreed sector or market, such as UK residential, commercial, or a mix of the two.
Some alternative property-focused investments are for professional investors only, and some are unregulated. Approach with caution and make sure you do your due diligence before deciding the best option for you or your client.
Property-focused investments can be less time-consuming than managing a buy-to-let portfolio and easier to both enter and exit than buying and selling an actual property. Plus, some of these investments can offer very attractive potential returns.
Learn more
Find out how the Seventy Ninth Group can help you or your clients access exclusive opportunities in the property market. Call us on +44 (0) 151 316 0392 or email info@the79thgroup.co.uk for more information.
