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Thursday 28th Septmember 2006
By GRAHAM NORWOOD
BUY-TO-LET is 10 years old and showing its age as yields and capital appreciation, even in the heady London market of 2006, are well down on the heyday levels of the late 1990’s. The market risks saturation in some areas, too. Last month the Council of Mortgage Lenders released figures showing that 152,000 loans were issued to buy-to-let landlords in the first half of this year, a 17 per cent rise on the same period in 2005.
This takes the number of outstanding buy-to-let mortgages across the UK to 767,000. About 35 per cent are believed to be in London, with another 20 per cent elsewhere in the south-east. But if you are addicted to bricks and mortar there are plenty of other ways of investing your money – here are four emerging sectors to consider.
The first scheme of this kind two years ago by developer Guest Invest, sold 20 rooms in a Westbourne Grove hotel for £235,000 each. Buyers could stay 52 nights per year for free, and receive a share of the hotel’s annual income. There have been six other London schemes since, the latest being Westminster Bridge Park Plaza, a hotel in part of County Hall on the South Bank.
“Studies in the US, where this kind of commercial property is better established, suggest that capital appreciation will mirror the mainstream housing market,” says David Galman of Galliard Homes, the London development company behind Westminster Bridge. But there are hitches to this investment route. Savills Private Finance, a mortgage broker, says few lenders will offer mortgages on the hotel rooms and those that do charge interest at 1.5 per cent above rate, and will only lend a maximum of 70 per cent of purchase price. Buyers must also pay stamp duty and legal and search fees, as with a conventional house purchase.
The biggest risk of all is that this is a new, emerging market – no one knows if demand will continue and if prices will rise over time.
Student apartments in officially-designed halls of residence are the only form of residential property allowed in Self-Invested pension Plans, or SIPPS.
This means there is only minimal tax paid on rental income and no capital gains tax payable at all when it is sold at a profit. Because halls of residence are professionally managed and have guaranteed student use, they are popular and easy to handle for investors.
Landlord Mortgages, a specialist lender, compiles a league table of returns from student property across the UK; London is top with 15 per cent gross annual yield. “With stiff competition for rented accommodation in university areas, investors are faced with a captive audience,” claims managing director Lee Grandin.
Nationally, student numbers are on the rise: an extra 150,000 student places will be required over the rest of the decade just to maintain the existing rate of 43.5 per cent of young people entering higher education. The sector will grow further as government tries to increase the proportion of under-30’s entering higher education to 50 per cent by 2010.
Add to this the number of overseas students in the capital, and the potential for investor’s looks enormous. “Bespoke student accommodation will be one of the biggest potential growth sectors in London,” says Liam Bailey of Knight Frank.
Back in 2001 there were just three unit trusts and one investment trust that majored in bricks and mortar – from next year there will be more than 100. In January the government will at last announce rules for Real Estate Investment Trusts (REITs), which will permit investors to shelter property portfolios in funds largely exempt from capital gains tax and corporation tax for the first time.
The eligible properties will include mixed-use schemes-for example, shopping centres with flats as an integral part, such as The Heart at Walton-on-Thames-as well as pure commercial schemes ranging from business parks to out-of-town shopping malls.
Until now, investors wanting to buy into mixed-use or commercial schemes have had to pay huge sums to buy individual properties outright. REITs, which have existed for many years in countries from the US to Bulgaria, allow investors to put in much smaller sums – the rules are expected to allow investments of £5,000 and upwards.
These small sums are handled by independent financial advisers who invest the pooled contributions into a number of different developments in different property sectors.
The advantages are that your investment is relatively low-risk – it is not tied in just one building in just one sector in just one location – and you do not have to work hard at being a landlord, finding and managing tenants and finances.
Stuart Law, managing director of property fund provider Assetz, says, “Investors are attracted to the hassle-free aspect of investing in property funds, which appeals to those who want to make money for their retirement but do not have the time to be a landlord.”
These are great if you have a property in an area of housing need – many areas of London and the south-east of England will qualify.
You lease your property to a housing association or local council, which then lets it out on your behalf for three, four or five years. You get a fixed guaranteed rent (even if the property is empty for some of the time) and the council or housing association manages all aspects of the rental and maintenance.
The hitches? The rent tends to be about 15 per cent below market value – although you pay no letting fees, so you may actually be in pocket – and the tenants may be claimants or large families, so wear and tear might be higher than average. You have no control over the selection of tenants, and you cannot sell during your agreed lease period.
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