The UK has been an attractive proposition for property investors all over the world for many years. But now, for those keen to achieve maximum returns for minimum effort, the more ‘hands-off’ approach of the alternative investment route is proving increasingly attractive.
Because, while the Buy to Let (BTL) option seems the most straightforward in generating healthy returns, there is a fair amount of time, input and growing legislation required to ensure a comfortable Return On Investment (ROI). This is often an excessive commitment that investors, particularly those based overseas, are reluctant to make.
Level of overseas investment
To understand the impact that this shift towards alternative investment may have on the UK housing market, we must first consider the scale of overseas investment. There are of course those who buy properties for family members – such as students travelling to enrol at one of the UKs prestigious universities – or as a base for holidays or meetings when needed.
But research from the London School of Economics suggests 70% of international buyers purchase properties as an investment – although it should be noted that their study focused solely on London, so this figure may vary across other towns and cities which will not attract the same level of global interest in investment.
According to estimates based on Land Registry information, there are 190,000 properties across England and Wales registered to an individual or company with an address which is outside the UK. Naturally, this does not reveal the full scale of overseas investment, given this only includes properties which are outright owned by one investor – and some may have another UK residential or commercial address which they can use on official documents.
The Buy to Let challenge
The sheer amount of regulation involved in managing a rental property in the UK – with well over 150 different pieces of legislation currently in place – makes any BTL arrangement exceedingly complex. There are new rights being given to renters; updates around the expected standard of homes; changes to how and when a landlord can choose to ask a renter to leave; and increasing pressure to make sure properties meet stringent sustainability expectations.
Indeed, such is the disruption surrounding sector overhauls, volatility in the housing market, and the increasing amount of red tape associated with BTLs, that we’re even seeing UK landlords selling up in volume. A recent LandlordZONE survey revealed 35% were intending to sell properties in the next 12 months, while the move away from BTL is so profound it’s been labelled by some as a ‘mass exodus’.
The day-to-day arrangements of owning a property portfolio can be passed over to an expert such as a letting agent, but significant decisions must still be overseen by the landlord, a process made all-the-more complicated by barriers such as time zones and language differences. This sort of outsourcing also reduces the ROI that can be made by funnelling a percentage of the rental yield towards the use of a third party to manage the property. So, it’s little wonder that international investors are joining UK-based landlords in seeking a simpler alternative.
Alternative investment
Thankfully, there are multiple options out there which have the potential to yield an above average return, without the ‘hands-on’ approach very much needed as a BTL investor.
Options include investment in real estate investment trusts: buying shares in the portfolios of a property company listed on the stock exchange and then benefitting from a percentage of their profit.
Structured investments also provide an attractive option, especially for investors who do not have expert knowledge of construction or land development. These types of investments are issued by developers to raise funds to either buy land or finance construction work on a project, giving them an alternative source of finance. After a set period of time, the investor begins receiving capital back.
During the investment process, a loan note is issued which sets out the terms of the agreement – ensuring that the original amount plus any interest accrued is paid back on a mutually convenient timescale. Interest can either be paid back periodically as ‘income’ or in one lump sum at the end of the term, known as ‘growth’. This method of investing typically offers higher returns than more traditional formats.
Investors can also choose whether to go it alone or become part of a wider group. In addition to reviewing the proportion of properties which were being bought for investment purposes from overseas, LSE researchers also looked at the types of investors active in London, dividing them into four main types: financial and investment institutions, developers, sovereign wealth funds and Ultra-High Net Worth Individuals.
Some had a direct hand in development, such as the firms involved in the renovation of the former Battersea Power Station, with others providing equity finance, purchasing properties at scale, or buying housing association bonds. This research, and many other studies, showcases the wealth of options available.
Expert advice should always be sought to ensure an investor is taking the option which is most suited to them and that risks (while they can never be completely eradicated) are minimised, with robust contract due diligence processes in place.
While we’re seeing a huge reduction in the appetite for BTLs, it’s unlikely this option will ever be completely eradicated, as for some this may be a preferred way of building a property portfolio. But for those looking for a hands-off approach, and particularly for those investing in the UK from abroad, exploring alternative investment options may be the way forward to earn a sizeable return without needing to dedicate huge amounts of time and effort to generate that all-important ROI.
