Property investment: safe as houses?
With latest house price data showing prices falling in real terms, we consider whether property still represents a good investment.
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The latest house price data from the Office for National Statistics (ONS) shows prices rose by just 1.2% in the 12-months to the end of May. With annual inflation in the Consumer Prices Index (CPI) at 2.0% in the same period, this means house prices are falling in real terms.
It’s a trend we’ve seen since the start of the year, although the longer term the story still favours property, with a 31.4% rise in the average property price over the last 10 years compared to inflation of 24.9%.
While sluggish prices are worrying property owners, it means there are good opportunities for investors entering the market. Bargains can be hard to find, though – low prices mean many sellers are holding off and so there are fewer properties on offer.
It’s also worth noting that the ONS data looks at all house price sale in the UK. There are other measures that may be more relevant to you – our own Coutts London Prime Property Index, for example, tracks the prices of property in London valued at over £1 million.
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Yields on the rise
Of course, property investment is not just about capital gain. Rental income is a key part of the appeal for property investors.
In the current low-interest rate environment, rental yields on property can be attractive to investors looking for income. With interest rates set to remain low for a prolonged period, we see property remaining popular for the income it can generate, more than the capital gain, and notably for landlords outside London.
Buy-to-let investors have seen yields rise in recent years as property prices have slowed or even fallen in some markets. Yields vary regionally, however. High property prices mean yields can be low in London, while regional centres – and university towns in particular – offer better opportunities.
Changing tides of taxation
Changes to the tax regime since 2016 have summoned further headwinds for the sector.
Supplemental stamp duty came into force in 2016, adding a 3% charge to the purchase of residential properties that aren’t replacing a buyer’s own or main dwelling. Then 2017 saw changes introduced to mortgage interest tax relief, substantially increasing the tax bills for landlords.
This underlines the point that gross yields don’t tell the whole story for property investors. As well as taxation, landlords need to allow for maintenance, mortgage servicing and periods of vacancy that can reduce the total yield received.
Some portfolio landlords are turning to limited company structures for their buy-to-let assets in an effort to mitigate some of the effects of the 2016 changes. However, this isn’t always a good solution, and will depend on the specific circumstances of individual investors. The issues can be complex, and anyone considering such a move should seek tax advice.
New opportunities arise as buy-to-let continues to evolve
Over time, the shortage of supply should put upwards pressure on rents. For renters, the UK constitutes a major global employer, attracting talent from all over the world. Regardless of the outcome of Brexit, the UK should continue to attract workers and students worldwide.
In the meantime, UK property will continue to attract global investors looking for diversification and a ‘store of value’ in a stable and largely robust economy.
A ‘build-to-rent’ market of purpose-built properties is emerging. Located close to city centres and employment hubs, with managed communal areas, onsite maintenance and long tenancies, they are focused on delivering rental income rather than capital appreciation. The British Property Federation estimates that there were 140,090 build-to-rent properties either completed, under construction or at the planning stage, in the first quarter of 2019.
Property as part of your investment portfolio
Recent below-inflation price growth should obviously be a concern for property investors, and underlines the importance of a diversified approach to investing. At Coutts, we see property as a useful diversifying asset for many investors. While we believe that a portfolio of conventional investment assets should form the core of your long-term wealth management – chiefly shares and bonds held in an individual portfolio or through investing in mutual funds – property can provide returns that aren’t directly correlated to other markets.
As with many other asset types, returns can vary between types of dwelling – commuter flats or student accommodation, for example – and different areas. For this reason, it’s important to understand what you are investing in before putting your money into action.
The latest house price data shows house price growth has slowed significantly since 2016. This is good news for investors in buy-to-let property, as rental yields have subsequently increased. But changes in the tax regime mean that investing in property has become less profitable. While property can have a place in a diversified portfolio of assets, investors should make sure they understand the complex drivers of the property market before getting involved.
When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.
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