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Safe as houses?

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Published on
31st January 2022

Property, a national obsession.  In certain national newspapers their go to reporting is often house prices, with future predictions from market ‘experts’.  In fact, they often add a house price value into an otherwise unrelated story, for reasons that escape me.  Certainly, in Europe it’s much more usual for people to rent their home rather than own it and the desperation to get ‘on the ladder’ seems to be much less as a result.

What about Property as an investment?  Well, for many people it seems to be the go-to asset, but should it be?  Certainly, there are many other options out there, but I think for a number of investors that physicality of bricks & mortar adds some sense of security.  Alongside that of course many have seen their property going up, and up in value and think that this is the norm.  Often forgetting, or not recognizing, the ‘gearing’ impact that having a mortgage can have in a rising market, by improving the actual returns received.  The piece that is less well understood is that gearing works both ways and it’s not that long ago that the spectre of negative equity stalked the land.

There are several things to be aware of that impact how the investment world sees property as an investment.  Firstly, the cost of entry, it takes significant capital to get access to bricks & mortar directly, either as a full purchase or with a mortgage and then of course you’ve got all the additional costs, such as legal fees, estate agency costs and Stamp Duty, remembering that if it’s an investment property you’re likely to be paying quite a bit more, an effective rate of 4% on an average home in England rather than 1% if it were your home.

Once you’ve got your investment property you then need to find a tenant, not necessarily the easiest thing, if you want a good one.  Alongside this you need to remember that tenants rent for a reason, and it may be that you see some fallow periods when you’ve still got costs, but no income coming in that will affect your returns.

You also need to maintain the property, this could well be quite a big cost, especially with the impact of green legislation yet to come.  Luckily you can offset some costs, such as maintenance and accountant fees against your income.  Sadly, however, if you’re a higher rate taxpayer you’re not able to offset your full mortgage costs against your rental, getting a 20% tax credit instead.  So, only half as tax efficient as it once was.  Did I mention that it’s likely that you’ll need to fill in a tax return?  Not the simplest thing for many of us to complete!

So perhaps after a number of years of successful property investing you decide you need some capital out of your asset or to sell totally? Well, the former is difficult, you’d likely need to find a mortgage, which if you’re retired may be tricky to find full stop, and again suffer the associated costs.

If you do decide to sell entirely then as an investment property you’re going to potentially be liable for Capital Gains Tax on any profit you may have made.  This is not at the rates for normal investments, typically 10% or 20%, but rather at 18% & 28%.  That all assumes that you can find a buyer at a price you feel is reasonable of course, which can take some time.  As an asset we do view property as illiquid for this very reason.

So, after looking at some of the factors impacting your decision to invest, or not, what have returns actually looked like, and as importantly compared to other assets?  Well, the average yield, or income, across the UK is around 3.63% on residential property this compares to an average yield on the UK share market of 4.1%, not forgetting that share income is taxed as dividends so for most people quite a saving.  That’s not to say that there aren’t pockets of higher yielding properties out there.  The average yield in Hull, for example is about 9.2%!  As I’m sure you know greater return does typically come with greater risk.  That said of the 50 towns & cities in Aldermore’s Buy to Let Tracker, looking for good areas for buy to let investors, 7 are in Yorkshire.  Additionally, the projected 4 year growth for the region from Hampton’s International is amongst the best in the country at 10.5%, so as a region we appear to be well placed.

However, over the longer term the numbers do look a little less attractive.  The IPF paper of 2012, ‘Time Varying Influences on Real Estate Returns’ show that on average property returned a gross average of 0.56% pcm compared to 0.65% pcm for the FTSE all share & 0.69% pcm for Bonds over the period 1990-2010.  Not forgetting the tax disadvantages that the former does have in comparison.

As hopefully, you can see like any investment property is not without its risks and anyone considering it should look at these issues very carefully before taking the plunge.  For me, I truly think that the wise investor diversifies their holdings at every opportunity, so rental property can have a place in a diversified portfolio, but don’t forget those more mundane opportunities that can add accessibility and tax advantage, such as pensions or ISAs.  Having all your eggs in one basket is rarely a wise move.

 

Jerry Sisk – Financial Planner

Email: jsisk@ge-wm.co.uk 

Tel: 07483 066754