With buy-to-let becoming increasingly challenging, what are the alternatives?
For decades, buy-to-let has been an immensely popular method of investing into the UK residential property market. According to the Council of Mortgage Lenders, a former industry body, lenders advanced more than 1.7 million buy-to-let loans between 1999 and 2015.
However, recent changes to legislation and taxation, such as the 3% Stamp Duty surcharge, have made buy-to-let less rewarding and less appealing for many UK property investors.
But this doesn’t detract from the asset class of property as a whole, which is one of the most resilient and impactful that investors can consider.
And whilst buy-to-let has certainly held a strong position in many experienced investors’ portfolios to date, an array of alternative options are available for those looking to increase their exposure to property without involvement in the buy-to-let market. The following eight routes can provide investors with potential to generate income or capital growth (and in some instances, both):
1. Property crowdfunding
A type of property investment whereby the funds of many investors (or ‘the crowd’) are pooled together, property crowdfunding can be used to buy a property or act as a loan to developers to finance a property development.
Typically, individual investors contribute a small percentage of the total amount. This can be beneficial for many reasons.
Firstly, it acts as a fast way of raising a large amount of capital. Secondly, investors who would prefer to commit a smaller sum can gain access to deals they would not otherwise be able to participate in.
For a property equity investment, returns typically come from rental income and any capital appreciation generated by increases in the underlying value of the asset. For a property-backed loan investment, returns are generally formed of the interest earned on the loaned funds.
2. Property bonds
One of the oldest forms of financial product, bonds (as an overall investment tool) aim to provide investors with regular interest payments, in addition to the repayment of the initial investment at maturity. Bonds are usually issued for a fixed term - generally two to five years - with a target fixed rate of return paid to the investor quarterly, annually or at maturity.
Property bonds are a form of corporate bond (also known as loan notes) issued to investors by specialist property lending companies. These generally function as a means of raising finance, often to contribute to the funding of property transactions or development projects.
Interest rates currently offered by UK property bonds can range between 4% and 15%, suggesting this alternative property investment has the potential to drive inflation-beating returns in 2022.
Another key draw of property bonds lies in the ability for investors to actively contribute to long-term positive social impact via property investing. Whether the investment takes the form of a regional residential development or a regenerative commercial project, investors can contribute to addressing the UK housing crisis via a more indirect route than buy-to-let.
When investing into bonds, investors receive a bond certificate and usually benefit from security over the underlying asset by way of a first- or second-ranking legal charge. Second charge provides extra security, and so interest rates - whilst they can still be generous - are often not as high as equity investments because they don't carry the same higher-level risk profile.
3. Joint venture property investments
An arrangement between two or more parties to combine funding with industry expertise, a joint venture (JV) property investment aims to create value from the development, acquisition and/or management of a property.
Delivered correctly and with a capable team, JV property investment opportunities can provide attractive returns for investors over a relatively short hold period, potentially between 18 months and two years.
Whether the overall project is large or small, the objectives are likely to remain the same: to deliver property schemes that generate a positive impact, often at a targeted regional level, and that - crucially - yield positive financial returns to all parties involved.
In the past, JV property investments were usually only available to institutional and corporate investors due to the sheer large scale and, therefore, the large capital requirements.
However, since then, technology has transformed the joint venture property investing market. For experienced private investors, JV property investments can now be relatively easily accessed via specialist investment partners and online investment platforms.
This form of alternative investment can prove to be highly attractive if approached and executed with an experienced team, because JV property investing displays the potential to deliver greater returns than many traditional investments. When compared with routes, such as buy-to-let, joint venture property investments are unlikely to require the same level of capital, effort and industry expertise to be successful.
4. Peer-to-peer lending
A form of direct lending to individuals and/or businesses, peer-to-peer (P2P) lending utilises online platforms as an intermediary between financial transactions. Because this form of lending is deemed as high-risk, investors have the potential to earn superior rates of interest when compared with traditional savings accounts.
More specifically, P2P property lending involves the matching of investors with borrowers looking to take out loans to finance real estate projects, which could range from buying-to-let, constructing a new development, or renovating an existing property for resale.
Borrowers use the loan to fund the property project, working on the understanding that they will earn enough to repay the investor with interest as specified on the loan's terms.
On average, P2P property lending can yield an annual 8% to 10% return on investment, as outlined by MoneyMade, an alternative investment platform. However, earnings depend fully on the terms of the loan and the borrower abiding by these terms.
An additional draw of peer-to-peer lending for many investors is the ability to invest via an Innovative Finance ISA (IFISA). The IFISA is a tax-efficient investment tool that offers investors the opportunity to generate interest on peer-to-peer loans, free of tax, and offers the full range of ISA tax benefits up to a maximum of £20,000 annually.
A growing number of platforms now offer P2P property-backed lending opportunities directly to investors online. This activity has expanded significantly following the retreatment of many banks from risker property lending (following the financial crash of 2008), meaning that a vast range of P2P property lending opportunities are likely to be available.
Furthermore, with the UK Bank of England Base Rate reaching 2.25% in September 2022, bank loans are becoming increasingly more expensive for individuals and small to medium sized enterprises (SMEs) operating within the property sector. This implies that P2P is highly likely to become a more popular source of finance for those undertaking property projects.
5. Real estate investment trusts
Often operating with the ore focus of providing regular income for investors, Real Estate Investment Trusts (or REITs) are businesses that generally own various types of property, primarily generating revenue from rental income on commercial and/or residential property.
Investors can buy shares in REITs and subsequently trade them on major securities exchanges. The fact that these shares are most often publicly traded can make them a highly liquid asset, and so favoured amongst investors familiar with public equities. The capital used to buy these shares is typically pooled with other investors’ capital to then enable the REIT to invest in property.
The main advantage of REITs for investors are the dividend pay-outs, as REITs are obliged to pay out 90% of their taxable profits to shareholders in the form of dividends. Another advantage is that share price fluctuations can provide scope for investors to profit from the timely buying and selling of REIT shares.
6. Property unit trusts
Providing investors with indirect exposure to a diversified portfolio of property assets is the primary purpose of Property Unit Trusts.
This type of property firm offers an open-ended grouped investment product under a trust deed, where investors' money is pooled together into a single fund which is managed by a professional fund manager. Unit holders have a right to the income of the fund, which is allocated monthly and paid at the end of each quarter.
Investment strategies can vary from manager to manager, with many aiming to deliver wider positive impacts in addition to strong financial performance.
7. Property open-ended investment companies
Operating as collective investment schemes, open-ended investment companies (OEICs) allow investors to pool capital with others to indirectly access a diverse range of asset classes. One specific branch of these companies includes property focused OEICs.
Investing in a property OEIC fund can be completed directly or through a Stocks & Shares Individual Savings Account (ISA). In the case of the latter, the investment would fall within the ISA tax wrapper, meaning that returns are tax-free. This can help investors minimise downside risk whilst maximising potential upside.
Property investments that may previously have been difficult to invest in on an individual basis, such as large-scale commercial developments, can be more readily accessed via property OEICs. Ultimately, this can make accessing the property market easier for investors, whilst also potentially providing more attractive returns than buy-to-let.
8. Shares in listed property companies
This form of property investment involves buying shares of publicly listed property companies, including UK firms such as Barratt Developments plc or Bellway plc. If performance is favourable, investors will most likely earn a share of the company profits via dividends. Moreover, if the share price appreciates, it is also possible to capitalise by selling shares at the higher price, as equities are a highly liquid asset.
In a similar way to investing in a property OEIC, shares can be held in a tax-free ISA, further boosting the attractiveness of the investment.
Overall, property continues to be a resilient and favoured asset class in the UK, with various investment routes available into it. Each of these routes can display the potential to be suitable for different investors, depending upon growth objectives, personal goals and levels of industry or investment experience.
In particular, the alternative property investment opportunities highlighted above each possess significant benefits when compared with traditional routes, such as buy-to-let. Perhaps most notably, the absence of maintenance costs, comparatively less considerable capital requirements and reduced levels of bureaucracy such routes tend to possess can make them more attractive than traditional buy-to-let schemes.
Regardless of the path an investor follows when aiming to diversify into property or further strengthen its presence within their portfolio, the increasing likelihood of the downfall of buy-to-let (following heightened market volatility and tightening landlord legislation), may help the numerous alternative pathways into investing in the property sector appear to be more viable and attractive options for UK investors in 2022.