Property has always been a popular asset for investors and for many, can make up their entire portfolio. As with other forms of investment however, the property market’s potential can be affected by external economic forces. With inflation continuing to rise, a major change in Government on the horizon and new legislation coming into force, investors may be left wondering if there are any current reasons to invest in real estate. Despite everything being thrown at the market however, it is still proving resilient and in this blog, we’ll explore some of the key elements that make real estate so attractive to investors.
1. Reason no. 1 to invest: A high cash flow industry
A cash flow is defined as the net income remaining after other costs and expenses are covered and for the property market, there can be plenty of cash left once repayments, taxes and fees are covered. Whether an investor is looking for a healthy amount of cash following a sale, or continuous income from rental opportunities, the property world has plenty to offer.
Property, as an asset class, has emerged as a clear winner over the past year according to Stripe Property Group. This is before any long-term potential is even considered. Capital appreciation of 9.3% was seen in the residential property market over the last 12 months, placing it well ahead of other tangible investments. Residential property has provided investors with better results than rare whisky, rare coins, designer handbags, classic cars, jewellery, antique furniture and even gold.
Rental yields are also holding steady across England and Wales at 5.5% and if investors know where to look, higher levels could be generated. In the Northeast of England, yields of 8.3% have been seen. For comparison, the FTSE 100 dividend yield may only reach 4.1% in 2022. When compared with other assets, investors in property may end up with a lot more cash in their pocket at the endpoint.
Source: Landlord Today, Property Reporter, Aj Bell
2. Few assets generate capital gains like real estate does
Cash flow is one of the reasons to invest in real estate. On top of that, few asset classes come anywhere close to offering the capital growth seen in the property market. Investors will never truly know how markets will move in the future, but historic house prices show how lucrative the industry can be.
In April 1968, the average property price in the UK (spread across all types of homes) was £3,595 according to Land Registry data. In May 2022, this figure sat at £283,496. That’s an increase of just over 7,785%. For comparison once more, the FTSE 100 index has generated a return of around 570% since its creation in 1984.
Capital growth in the property market has also proven particularly resilient in the face of dire economic news. House prices have risen in the face of multiple recessions, looming geopolitical conflicts and a global pandemic. Events which regularly led to crashes in the stock, precious metals, and commodity markets, among others.
Source: Land Registry
3. The market is desperate for more supply
A lot of this growth has come as the result of undersupply in the market, especially in recent decades. Buyers and renters alike are desperate for new investment and suppliers may be able to take advantage of this.
Private investors in particular may be viewed as saviours over the coming years. Various Government administrations have promised to build more homes in a bid to support first time buyers. However, the state’s efforts have left a lot to be desired. In recent months, the Government missed its new build completion target by 40%. Entrepreneurial agents from the private sector could step in to fill the void.
This undersupply has also led to bidding wars among renters. A survey of over 440 letting agents, spread across 4,000 UK-wide branches, found the average number of available rentals on their books almost halved, from over 30 to just 15.
Whether dwellers are looking to buy their own home or rent one out, they’re likely desperate for a bigger pool of options.
Source: Mortgage Solutions, BBC
4. There’s going to be more people – and they’ll need somewhere to live
Competition may become even more intense over the coming years given the UK’s population is projected to rise. Albeit, growing slower than what has been seen in previous decades, the ONS still predicts the UK population will rise by 2.1 million to 69.2 million by the mid-2030s.
Millions are expected to be born here over the next decade, while millions more will immigrate to the UK. We’re also facing an ageing population, with many of our elders expected to have retirements lasting decades. All these demographics will need somewhere to live, in homes catered to their specific needs and tastes.
Source: ONS
5. You can supplement your retirement
By looking at other areas of financial planning, you’ll be able to see there’s reasons to invest in real estate outside of the obvious. As more people enter their later years, they’ll likely want to figure out how to make their funds last. With life expectancy on the rise, healthy retirees could easily see their retirements last 30 years or so. Private and state pensions alike are unlikely to last as long as needed in the modern world.
There could be more demand for property to be factored into retirement planning as people try to supplement their pots. Indeed, some two fifths of England’s landlords have already invested in property to contribute to their pension, according to the Government’s English Private Landlord Survey.
With costs rising across the board, there could also be opportunity in housing later-life renters. The number of people expected to rent in retirement as opposed to living in their own home may be on the rise, meaning a new market could emerge for landlords.
Source: The Telegraph, Property Reporter
6. Now may be an opportune time to invest in real estate
The property market may be especially welcoming to new entrants, given that existing participants are on the move. In recent months, the Government has made a few legislative changes which has spooked some investors. A Renters Reform Bill is on the horizon, as is new environmental requirements.
Some landlords have declared they’ll be selling up in response to these changes. Arguably, this could be short-term thinking on their part, but it could present new buyers with fresh reasons to invest in real estate.
Some sellers may be in such a rush to exit the market that they could accept less-than-perfect offers, giving new investors the chance to bag a bargain.
Source: The Telegraph, Property Reporter
7. A range of tax perks are available
There are many tax perks available to property investors. While accountants and other experts will+ be needed to fully take advantage of everything that’s out there, there are a few basics most will be able to wrap their heads around.
For landlords, it may be possible to claim the expenses of running and maintaining a property, which reduces a tax bill. Water rates, council tax, the costs of services and legal fees can all be deducted.
Elsewhere, commercial investors may be able to benefit from Business Premises Renovation allowance, while residential buyers could utilise Private Residence Relief.
Investing in property could even help with estate planning, with there being special rules for main residences in Inheritance Tax calculations.
Source: Which?, Gov.uk – Private Residence Relief, Gov.uk – Business Premises Renovation Allowance, Gov.uk – Inheritance Tax
8. Real estate can diversify your investment portfolio
Investors, amateur and professional alike, may fall into the trap of putting all their eggs in one basket. While nothing can be guaranteed in the investment world, diversifying a portfolio is a good place to start in trying to lock in consistent returns.
Some may think they’re plenty diversified by owning a range of shares but often, British investors will only put large chunks of their wealth in UK companies. This could put them at great risk of missing out however, given the UK stock market only makes up around 4% of the world’s total equity.
And often, specific asset classes move in cycles and, to a certain degree, are synchronised with each other. If you hold most of your money in the UK stock market, or gold, or bonds – how would you cope if those individual markets crashed?
Diversifying into property will add one more insurance policy to your portfolio. Having consistent rental income could be a lifesaver in times where dividends dry up, for example.
Source: This is Money, Statista
9. Property is one of the few investments you can physically take comfort in
The tangibility of property may be another strength, especially during times of crisis. Buyers may take comfort in the security of bricks and mortar, especially if they’re new to the investment world. Few will be able to truly wrap their heads around triple-leveraged ETFs or commodities derivatives, but most will be able to grasp property and its upsides.
Also, if a house sees its price decline for whatever reason, holders will still (for the most part) be able to live in it. You will never be able to take shelter in a hedgefund!
10. Wealth can easily be built through property
Over the long term, property can allow investors to build their wealth sustainably. While other asset classes can also contribute to this, they can be much more susceptible to short-term fluctuations in value. A company’s share price can be sent plummeting by a CEO’s tweet. For every Bitcoin, there are many cryptocurrencies that go to zero after having millions spent on them.
The numbers also speak for themselves. According to the latest data from the ONS, median household net wealth in Great Britain rose to £302,500 between April 2018 and March 2020, with property and private pensions accounting for more than three-quarters of the total.
Source: ONS
11. A broad range of strategies are available
On top of providing diversification in a wider portfolio, property also provides a broad range of strategies for investors. There can be literally hundreds of reasons to invest in real estate. Capital gains can be sought by long-term buyers while landlords can get rental income from the buy-to-let scene.
But, investors can also utilise property flipping strategies, commercial conversions, student accommodation developments, holiday lets and whole host of other options. No matter how niche an investor may be thinking, they may be able to find what they’re looking for in the property market.
12. Multiple forms of returns can come in at once
Where investors are willing to get strategic and put in a bit of legwork, it is also possible to combine multiple kinds of returns from real estate. This is especially useful for those willing to make property investment their main business or livelihood.
By mixing it up, investors could receive money from a house sale while generating a rental yield at the same time. Rents can come in from students, retirees and even businesses.
Profits can be generated from a whole apartment block one month, and a single renovation project the next. There is so much flexibility in the property market and it can be exciting for investors to explore their options.
13. The rental market is thriving
One of the most exiting elements of the property world at the moment is the rental market. With house prices reaching unprecedented highs, many are being priced out and will have to look to long-term renting. Landlords appear to have caught onto this and one of the reasons to invest in real estate.
Just under half of landlords with multiple properties plan to expand their portfolio in the next year, according to Handelsbanken. This could prove very worthwhile as Generation Z floods the market with new tenants.
As this generation becomes more independent and flies the nest, their rental bills are expected to rise 10-fold compared to what was seen just three years ago. As more millennials age and finally get on the housing ladder, Gen Z could step up and provide landlords with a new goldmine. In this year alone, they’re forecasted to pay £11.7 billion in rent.
Source: Landlord Zone, Letting Agent Today
14. There’s cheaper options out there with plenty of potential
There is undoubtedly potential in the property market, but some investors may be disheartened by the barrier to entry. In certain hotspots, such as London and the Southeast, prices can reach eyewatering levels.
But, in other parts of the country, prices are much more reasonable. Northeast Lincolnshire for example, currently only has a house price to earnings ratio of around 3.5.
Opportunity can be found outside of the capital and where prices are lower, they tend to have more room to grow. In the year to May 2022, house prices in the South West grew by 16.9%. In the East Midlands they rose by 15.2%, while the North West saw hikes of 11.5%.
During the same period, prices in London rose by 8.2%, the lowest growth seen across England.
15. Real estate can be a hands-off investment for those who seek it
Property investment can be very time-consuming for those specifically seeking out complexity. But at the other end of the spectrum lies a relatively hands-off experience.
One of the reasons to invest in real estate is that landlords can receive passive income on a monthly basis by locking-in tenants for long-term lets. Agents and other specialists can also be hired to manage the finances for those who want to minimise their admin. Additionally, estate agents, tax planners and various experts can all be utilised to help manage a portfolio, making it relatively easy for investors without much experience to get involved.
16. Multiple payment plans and financial resources are available
Just as with the variation at play in the types of property that’s out there, there are also many payment plans available to buyers. No matter how complicated a buyer’s background, they’re likely to find the right option for them.
Property can be bought via standard mortgages or with cash outright. Payments can be made in instalments and bridging finance can keep the ball rolling where chains are in play.
The Government also has a range of schemes available to buyers to help get them onto the ladder. Shared ownership and the revamped right to buy scheme being obvious examples.
17. Real estate can be a fairly safe investment
Property, over the long-term, has proven itself a relatively safe investment time and time again. Values continuously rise, no matter how many pundits predict a crash is just around the corner.
While a complex area, the market’s longevity can be boiled down to supply and demand fundamentals. Some industries can easily fall out of favour or become obsolete, taking their investors down with them. Blockbuster had revenues of billions before streaming took over the world, while professions such as lamplighters are a thing of the past.
But, it’s fairly safe to say that people will always need a place to call home, while businesses need bases to operate from.
18. A solid inflation hedge
Another reason to invest in real estate is that property can be particularly useful during times of high inflation. Generally, there can be a positive relationship between GDP growth and real estate demand. As economies grow, corresponding demand for property tends to drive rents higher, pushing capital values up in the process.
As such, property tends to hold firm when the cost-of-living rises. This has proven the case even in the face of the sky-high inflation rates seen in recent months.
Historically, average house prices have dramatically outpaced inflation. According to This is Money, if the average home price had risen in line with inflation since the early 1950s, today’s prices would sit around the £63,000 mark.
Source: This is Money, Investopedia
19. Investing in real estate can be good for the soul
Aside from the financial benefits, investing in real estate can be very fulfilling. Knowing you’re providing properties for families and businesses in desperate need of space can be considered a social good.
As an investment, property can also allow for more tangible control compared to other assets. Investors can decide how to renovate a home, who can live in a flat, what kind of business will rent their property etc.
Other assets may be more easily swayed by elements outside of your control. You may own shares in a company, but you won’t be able to stop other holders from selling theirs, driving down the price in the process. Similarly, you can’t force a mining firm to find more gold.
20. A whole generation of new buyers could be on the horizon
Having said that many are priced out of the housing market, it’s also true that younger generations are on the verge of inheriting billions worth of wealth. In the UK, £327 billion could be passed onto 300,000 youngsters over the next decade and they could be very keen to get into the property game.
Those who can get ahead of this demand are likely to do very well. Being patient now and holding property for the next generation of buyers down the line could be wise.
Source: Barclays
21. New geographical markets could emerge
Another reason to invest in real estate: fresh opportunities could be on the horizon. The Department for Levelling Up, Housing and Communities recently announced it will be utilising derelict and underused brownfield sites for new housing.
Additionally, while we’re yet to know who the next Prime Minister will be, both Rishi Sunak and Liz Truss have mused on housing plans over the years. Mr Sunak has focused on launching energy efficiency schemes for the UK’s housing stock, while Ms Truss said the Conservatives should be open to building on the green belt. No matter who takes the mantle, many experts in the field agree supporting the property market should take top priority for the new leader.
Source: Gov.uk, Politics Home, Politics Home
Disclaimer
MFS are a bridging loan and buy-to-let mortgage provider, not financial advisors. Therefore, Investors are encouraged to seek professional advice.
