Why Invest in Residential Property?

Posted July 31, 2019


Why Invest in Residential Property?

We’ve highlighted the property market, the investment opportunities and how property-backed lending may be the way forward to reach the residential investment market.

Investors are known to categorise investment opportunities into what are called asset classes, with equities and bonds probably topping most lists. However, the asset classes available to investors are more varied than this simple binary distinction. There are also those that are called real assets i.e. tangible assets, which can vary from gold and other commodities, through to property. 

Many investment experts call these “alternative” asset classes but, property in particular – both commercial and residential – is closer to being a more conventional asset class as are equities or bonds for many private investors.

What are the benefits of investing in residential property?

What is the difference between commercial and residential real estate? You can find out more in our article here.

How well is the property market performing?

Back in 2017, property consulting firm Savills brought out a fascinating piece of research. It suggested that property for most was in fact the dominant asset class – as explored in the graphic below. No evidence suggests that the proportions are likely to have changed. For many, properties are in fact the default asset of choice for long-term investing.

Global real estate universe in comparison (as at YE 2017)

Global real estate universe in comparison

Source: Savills World Research

We can see that residential property is a significant component of this broad real asset class, this class can easily be summed up in the two charts below.

The first chart - from the government Office of National Statistics - shows the annual house price change for all UK houses over the 12 years to April 2019. Despite peaks and troughs, house prices have continued to show positive gains year on year, even as the rate of increase has declined in recent years. Another crucial observation – the maximum downturn based on these numbers was a 15% loss in 2008/2009 which compares favourably with a loss of 35% (or more) for some shares or equities during the same period - the global financial crisis.

Annual house price rates of change, UK all dwellings (from Jan 2006 to Apr 2019)

Annual house price rates of change, UK all dwellings

Source: HM Land Registry, Registers of Scotland, Land and Property Services
Northern Ireland, Office for National Statistics – UK House Price Index

This second chart below - also from the ONS – shows how these year-on-year increases have accumulated over time to produce strong, compound capital gains.

Average UK house price (from Jan 2005 to Apr 2019)

Average UK house price

Source: HM Land Registry, Registers of Scotland, Land and Property Services
Northern Ireland, Office for National Statistics – UK House Price Index

However, investing in residential property doesn’t only produce capital gains of course. Owners of a property can also expect to receive an income via rents – the yield will vary based on the type of property and the location, with typically mid to low single digit percentage returns.

Whatever the actual yield per property, aggregate data suggests that rents have been continuing to increase. Rightmove, for instance, runs a widely used Rental Price Tracker, the most recent of which is for the second quarter of 2019. This shows that, despite all the talk about a depressed housing market in the UK, average asking rents nationally are at an all-time record high and rose 2.7% in Q2 2019 alone, according to Rightmove.

How can I access residential property investment opportunities?

if all this sounds promising, there is however one practical challenge – how can investors access residential property as an asset class?

Investors can, of course, directly purchase a property and then rent it out – becoming buy- to-let landlords. This has become hugely popular in recent years, as the chart below from challenger bank Shawbrook demonstrates. It logs the number of new buy-to-let mortgages issued in the years up to 2018.

Number of new buy-to-let mortgages (per annum)

Number of new buy-to-let mortgages

Source: UK Finance

What issues and risks do you face owning a buy-to-let property?

On the face of it, some issues are more practical, i.e. the sheer effort of maintaining a rental property can be time consuming and expensive, especially if the potential for capital gains is more subdued.

Another issue facing buy-to-let investors is that, as values of properties have increased and the amount banks are prepared to lend has reduced, the required increase in equity has resulted in buy-to-let investments lifting out of the range of many investors.

Investing directly in a property also introduces another risk – a lack of diversification. One of the golden rules of investing wisely is to diversify in order to control risk and logic alone would suggest that a portfolio of multiple properties might be an intelligent way of mitigating property specific risks. But this might be unaffordable for many investors as prices have increased.

You can read more about the importance of diversification in investment in our article.

What other options are available for those wishing to invest in property?

When it comes to commercial property, building exposure to a portfolio of income producing assets (offices, shops, and industrial units) is easier via what are called property funds, or more specifically real estate investment trusts, which are quoted on the stock exchange.

These companies or portfolios of properties are actively run by the management or by a fund manager, with shares easily bought and sold in real time via a stockbroker or adviser. Unfortunately, there are less residential property funds available to investors, with just a handful offering a portfolio consisting of hundreds of different properties.

We at Fitzrovia Finance, amongst other selective lenders, offer loans that can be secured against property. These are made available to a range of different, vetted borrowers with strong track records, many of them developers or landlords. This type of investment provides the opportunity to diversify investments as well as providing an alternative source of income.

The key point to remember is that the loan is best secured with a first charge over a property. Property-backed loans have been the fastest growing segment of this market, and have mushroomed in size over the last few years. Numbers from independent research firm, Brismo, show that the property-focused online lending market has now grown to roughly £4.9 billion in aggregate terms.

How does property-backed lending investment work?

It is important to note that whilst this investment method crucially allows lenders on property investment platforms such as Fitzrovia Finance to avoid many of the risks associated with direct ownership it also only offers the investor an interest rate return. Investors do not share in the increase (or decrease) of the value of the property. Investor’s individual loans can be accumulated over time into a property debt portfolio which is diversified with a relatively small overall investment. For a £1,000 investment an investor could invest across 10 loans. There’s also none of the practical challenges explicit in buying your own buy to let properties. And borrowers are also offered some security through the terms of the loan – Fitzrovia will not lend out more than 65% of the value of a property in a loan. That means that there is security for investors worried by the prospect of declining property prices – a decline of say 2% or even 4% a year in the value of a property shouldn’t have too great an impact on a loan which can bear a 35% decline in the property value. This conservative risk control plus Fitzrovia Finance’s unique ‘7 Step risk controls’ process means that investors can earn a risk-adjusted return of up to 5.5%* per annum.

You can find out more about property-backed lending with us here.

Confused about any of the terms discussed? Head over to our glossary of investment terms to find out more.


*The indicated return is an estimate that investors can earn, after fees but before bad debt and tax.
View Fitzrovia Finance platform statistics here for more details.