Property prices in the capital maybe cooling, but look outside of London and the housing market is presenting savvy investors with high yielding buy to let opportunities.
Despite considerable fluctuations in the housing market over the past decade property remains one the favoured investments for Brits. According to Barings Asset Management, five million Britons are relying on their property to provide their pension. While over-reliance on a single asset to provide income retirement is foolhardy, property can play an important role in a well-diversified portfolio.
After building up a core holding of global equities and fixed income, investors can add uncorrelated assets such as property to boost income and provide a hedge to fluctuations in the stock market.
Recent research by HSBC suggests that regionally, Southampton offers buy-to-let investors the best return on their investment, with an average house price of £143,011, average rent of £1,040 a month, gross rental yield totals 8.73%. Manchester has an average house price of £104,244, average rent at £693 a month, resulting in a gross rental yield of 7.98%.
Buy-to-let yield does not come easy however; property owners must consider upkeep costs, periods of time when the property is not let, buildings and contents insurance and background checks on potential tenants.
Investors without the time or inclination may want to consider a property fund linked to the residential housing market.
TM Hearthstone UK Residential Property Fund invests in private rented sector housing across the mainland UK regions, with total returns comprised of capital growth and rental income. Year to date the fund is up 6%, and is currently yielding 2%. The fund is available on online platforms and can be held in an ISA and a SIPP.
As with any open-end property funds, investors in residential property should be cautious about liquidity. Property is illiquid, unlike stocks which can be bought and sold electronically in a matter of seconds property is slow to trade and has high transaction costs. In 2008, commercial property investors were unable to access their cash as several funds imposed exit restrictions. These open-ended funds faced a sell requests they couldn’t honour as the property market crashed and investors wanted out.
The Castle Trust Housa is a tracker linked to the Halifax Price Index, the five year Housa promises to pay 1.5 times the rise in the HPI – and if the index falls it will pay 0.5 times the fall.
Student Housing Boosts Income
According to a BDRC Continental report commissioned by Paragon Mortgages, student lets typically outperform the wider market because they are let out on a per-room basis rather than a per property basis, earning landlords an average income of 6.5%. In contrast, young couples earn property investors just 5.9% a year. This fluctuates regionally and can rise as high as 10% in North West England. Year to date student property prices have risen 7.6%.
The number of students in need of accommodation is growing – with 2.3 million students in the UK currently, this is set to be boosted by international undergraduates, growing at a rate of 20% over the next five years.
However, student tenants bring with their own specific set of challenges and properties let to students can be more prone to accidental damage and burglary. If you are willing to take on the administration the returns can be rewarding, if you’re not, you can always outsource management to student property funds.
Urban Student buys, converts and manages student accommodation across the UK. Unlike some other bricks and mortar open-end funds which raise liquidity concerns, Urban Student offer a four-year Direct Property Investment Bond which can be held in a SIPP and yields 7% a year – with a 2.5% bonus on maturity. The bond can be held in a SIPP and is available direct.
The Mansion Student Accommodation Fund was launched in 2009 and returned more than 30% to investors in its first year, although performance has since dropped off, with total returns equalling 9.7% in 2013. The fund targets capital growth through careful acquisition and management of suitable properties.
Before You Invest
It is very important to consider your existing exposure to the residential property market before upping your holding with a residential property fund. Your main residence is often an investors single largest holding and it should be considered as part of your investment portfolio when calculating asset allocation. If your house makes up the majority of your investment portfolio, it may be more sensible to allocate funds towards less correlated investments such as equities and bonds.
