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A safe haven investment for volatile times


housing development

Investors often seek a safe haven for their money in normal times.  When life and investment markets become volatile, it is a natural desire for many to seek calmer waters.  

Contrary to the sentiment of many investors, experienced investors often welcome volatility as it often provides potentially lucrative investment opportunities.  Whilst mainstream investors withdraw from the market, astute investors are at their most active as they are aware this is when the best opportunities exit. A recent example of such a scenario was in the depths of the financial crisis of 2008. When many investors took fright due to the chaos caused by the over leveraged banks and the sudden freezing of credit, experienced landlords pounced and bought property at comparative low prices. The similar experience was experienced in equity markets in March due to the onset of Covid-19.

In order to make the most of any investment opportunity, an investor should have a clear strategy and know what they wish to achieve from their investment and what is realistic. Importantly they should also be prepared to ride out the storm, and not expect to make quick profits.  Greater rewards normally are concomitant with great levels of risk.  There are investment strategies which if adhered to can balance lucrative returns with a balanced level of risk. 

 

It’s an ill wind that blows no good!

Several investment considerations should be posited before committing to an investment:

  • An investor should know and be comfortable with the type of investment that they are considering.  There is little point in hoping to benefit from an investment opportunity if you spend day and night worrying about it.  Residential property is a favourite for investors as it is reasonably easy to understand, with many investors benefiting from their personal experience and financial gains from owning property in which they reside. It is worth noting that the mindset for an investment property should be different to that of a property in which you wish to buy to live in. 

 

  • Consideration should always be given to how likely the proposed investment is likely to suffer steep falls or gains in value? Over the medium to long term, UK residential property has provided steady capital growth and has not suffered steep and sudden falls in value as is often the case in equity markets during times of uncertainty. 

 

  • Be clear and realistic what you expect from your proposed investment. The general mantra that the greater the level of risk the greater the return generally holds true.  It is important to consider what level of risk you are comfortable with.  No investment is totally risk free.

 

Is buy-to-let investment dead?

The traditional buy-to-let model does not make financial sense for many investors any longer due to a raft of recent changes.  Over the past several years, the UK government has imposed tax changes to effectively penalise the landlord who may have one or two properties.  The premise behind this action was to raise further revenue, and to address the concern that landlords were pricing first-time buyers out of the marketplace, with financial incentives placed more firmly in the landlords favour vai mortgages.

Favourable buy-to-let mortgages are now restricted, with a much tighter lending criteria which now takes into consideration, rental cover, the number of properties a landlord has in his portfolio, higher levels of deposit and the landlord’s personal circumstances. 

Property management and the associated costs in repairs and the management of the property directly or via a letting agent has driven many buy-to-let properties to be cash negative.  Additionally, the property may have ‘void periods’ where the property lies empty. Not only are investors faced with not receiving an income, they are also responsible for associated bills such as council tax, utility bills and upkeep.  These expenses are often overlooked by investors and can have a material effect on whether the investment is profitable.

Given the tumultuous events of Covid-19, a host of other factors can impact on profitability.  Many employees face an uncertain future and the potential loss of income.  The Government has introduced new legislation regarding tenant evictions.  This has had a disastrous effect on some individual property investor portfolios.  Unscrupulous tenants have taken advantage of the eviction ban to withhold rental payments. In some cases the duration has been over a year.  The  substantial court backlogs, and new legal procedures will stretch any legal judgement for many over well over a year.

Given the increased level of risk, greater capital commitments, potential loss of income and costs, increased taxation, the multiple benefits of investing in the traditional buy-to-let are no longer present and make this particular form of investment less appealing.

 

What are the alternatives for property investors? 

Whilst it may seem gloomy for investors who have traditionally favoured investing in property but are now less enamoured with such an investment form given the aforementioned reasons, is there an attractive alternative?

Fortunately, investment in residential property via a syndicate offers an exciting and lucrative option. Property syndication offers several investment benefits over the tradition buy-to-let  model.  

What is a property syndicate?

A property syndicate is a group of investors that combine their investment funds to purchase property. This enables investors to have greater purchasing power than might otherwise be afforded, and benefit from outsized financial returns in rental income and capital gains. Additionally, given the lower financial commitment, it also lowers the potential risk and enables investment in multiple property syndicates. 

 

The benefit of having a Housing Association as the tenant.

Housing Associations are popular in the UK and are private, non-profit making organisations that provide low-cost ‘social housing’  for people in need of a home. Any budget surplus is used to maintain existing housing and to help finance new homes. Whilst being independent,  the Housing Associations  are regulated by the government, and receive public funding.

Housing associations provide a wide range of housing, some managing large estates of housing for families, while the smallest may perhaps manage a single scheme of housing for older people.

There are numerous benefits to renting to a Housing Association (HA).  A few are listed below.

  • The HA agrees to pay an income on the property, normally on a monthly basis. 
  • No HA has ever defaulted in the rental payments.
  • Tenancies for an agreed period of time.  The HA is responsible for all tenancy issues, including all maintenance issues and costs. 
  • Investing in social housing/affordable homes is altruistic. It helps serve the community in providing vitally needed social housing, of which there is a severe shortfall which is only forecast to increase. 

The combination of collective purchasing power; investing in property that might otherwise be out with an investor’s normal means; security of  a regular income over a fixed period of time and no maintenance costs, makes syndicate investing in Housing Association property compelling. Providing lucrative returns whilst balanced against a low level of risk.

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