Industry Insights

Alternative options to becoming a traditional property developer

The traditional routes to property developing and investing are straightforward, long established and still with us today.

First, you buy some land, the cost of which is likely to be much lower than for developed real estate. If you buy wisely, you can hold onto it until a developer comes along, gets planning position for it and makes you an offer for - hopefully - many times what you paid.

You could also buy some land, build houses on it and sell them. This assumes you get the necessary planning permission, but even if you do, it takes a lot of capital and is not without risks.

And obviously, on a 'simpler' basis, you could buy a house which is already built, improve it in some way and then sell it for - ideally - a profit.

Being a landlord

Or, instead of selling it, you could become a landlord and rent it out, receiving income by way of rent paid to you by your tenants. This rose to popularity in the 1990s when it became known as buy-to-let.

Then, low interest rates not only made the returns attractive compared to other forms of investment, but they also allowed investors to borrow cheaply in order to fund the acquisition of properties to rent. Coupled with soaring property values, it meant that not only did the investment bring a good return, but its capital value was also growing.

However, a few years ago, the government came to the conclusion that the buy-to-let market was distorting the wider property market and stepped in to make it a less attractive option. An additional 3% Stamp Duty charge was introduced for second homes, making the purchase of investment properties more expensive.

So, whereas to buy a £200,000 property in which you live yourself will carry a Stamp Duty bill of £1,500, buying it as an investment will land you with a tax bill of £7,500.

Read more: with buy-to-let tax reliefs going, what are your property investor options?

Further changes include reining in some of the tax reliefs available to property investors, and introducing new underwriting rules to make it harder for investors to raise the funds to finance property acquisition.

This had an immediate effect. A Residential Landlords Association survey in 2016 questioned 2,883 landlords and found that no fewer than 58% were considering reducing investment in their property portfolios as a result of these changes, and property expert Savills found that mortgaged buy-to-let market purchases have fallen by 43%. This leads industry observers to predict that we will see a movement towards professional landlords, with the sums no longer adding up for investors with portfolios of only one or two properties.

But this still does not change the fundamental attractions of property as an investment.

A new core of property investing

In the years following the banking crisis and the credit crunch, commercial property transaction volumes were subdued. However, by 2015 the global level of activity had climbed back to "within a whisker of its pre-global financial crisis high", according to RICS (Royal Institute of Chartered Surveyors) chief economist Simon Rubinsohn.

As confidence in the property market has grown, investors have moved into international real estate markets and there has been a shift in what were considered to be ‘core’ property investments, according to RICS.

For example, student housing, seen as an ‘alternative’ investment a few years ago, is now being treated like a traditional property investment. Global investment in student housing has more than doubled from US$3bn in 2007 to US$7bn in 2015.

For those looking abroad, there can be tax benefits to investing in overseas properties, but, of course, managing your investments can be more difficult.

Similarly, while new alternative investment properties such as data centres and hotels provide new opportunities for investors, the fast pace of change in the global real estate market also brings risks.

Hotels, for example, are being hit by the rise of Airbnb-style models, and corporate occupiers are increasingly moving outside of central business districts. There is also the long-standing challenge of getting accurate valuations of properties both in rising and in falling markets.

Indirect property investments

There are, however, other non-traditional ways of investing in property which don’t call for such a hands-on level of involvement, nor for the same levels of capital investment.

You could, for example, buy shares in a listed housebuilding company. Your exposure is limited and you can invest modest sums. Also, if you need access to your cash, you can theoretically sell your shares at any point.

Another alternative is to buy into a property fund that buys shares in companies engaged in the sector. Or, you could buy shares in a Real Estate Investment Trust, known more commonly as a REIT. Most of the UK’s largest property companies have converted to REITs, which escape much of the tax on residential lettings.

However, at least 75% of REIT profits must come from property rental, and 75% of the company’s assets must be involved in the property rental business. REITs must also pay out 90% of their rental income to investors.

Read more: an introduction to property investing - direct vs indirect investing

Another style of indirect investment in the property market comes in the form of property bonds. These are corporate bonds issued by a company to fund property projects, which could be specific developments or a portfolio of developments to be rolled out over time. The bonds are secured against the properties that the funds are invested in.

The investor lends the face value of the bond to the issuer, repaid when the bond matures. Each bond also specifies a fixed interest rate and the interest is paid to the bond holder at regular intervals throughout the bond’s lifetime, or at maturity.

With new internet-based lending platforms, everyday investors can invest into property in this way with particularly small sums, especially when compared to many of the other routes into property.

Online platforms have also been developed where large numbers of investors can come together to invest through crowdfunding, investing in projects led by developers looking for finance.

In it together

Similar platforms are also now available to fund property developments through Joint Venture Agreements, giving investors the ability to invest into a Special Purpose Vehicle (SPV), with the money they invest used for a specific development.

If the houses sell for more than forecast, your return will be higher, because the cash returned to an investor as a percentage of the profit achieved equals the proportion of equity held.

Read more: Is joint venture investing the best way to get into property investing?

A big attraction of this kind of investment is that the investor has the assurance of investing alongside experts and the security of having an asset-backed investment.

The time frames for a return are typically 18 months to two years and as little as £1,000 can be invested in a single project, allowing you to spread the same amount of capital that would be required for other routes into property across numerous developments.

Investing in property

Property is still a popular investment and it likely always will be. In fact, its popularity is only likely to increase with the arrival of new forms of investment.

As we have seen in recent years, such new forms of investment are opening up property investing to a wider audience than ever before, largely as they don’t call for a large capital outlay or in-depth, specialist expertise or knowledge of the market.

Property isn't a risk-free investment, but with the variety of options available, it's becoming increasingly possible to invest in property in a way that suits your specific portfolio needs.

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