The UK’s property market has long been an attractive target for investors. Up until recently, it had options for investors of all sizes. Now, however, smaller investors may be wondering if property investment is still worth it for them. Of course, this is an individual decision. There are, however, some common factors that most investors should consider.
The traditional benefits of property investment
Investors have traditionally been drawn to property by its combination of a steady income stream plus the prospect of long-term appreciation. Diversification, leverage and tax benefits were nice bonuses. Over recent years, however, the outlook for all of these has changed.
Income
Property can still offer a steady income but it has arguably ceased to be a fairly sure bet. Furthermore, increased market regulation has made it much harder for landlords to deal with tenants who can’t or won’t pay.
Appreciation
Property does still hold out the potential benefit of capital appreciation. Right now, however, that appreciation could take a very long time to materialise. Its impact may also be diluted by greater homebuilding.
Diversification
Diversification still can be a benefit of property investment. With that said, there are other ways to achieve diversification. Two obvious examples are investing in property-related shares and investing in precious metals.
Leverage
Property can be used as collateral against other purchases. This may not, however, be enough to justify the purchase. In essence, it begs the question of why an investor is using leverage in the first place. The obvious answer to this is to buy higher-priced investments such as property. In other words, you can leverage property you already own to buy more.
Leverage, however, carries risks, particularly if you’re investing as an individual (i.e. outside of a limited company). It can be safer to avoid it and just invest with the disposable funds you already have.
Tax benefits
Property investment used to attract several tax benefits. Over recent years, however, the tax landscape for landlords has become much less favourable.
This in itself does not have to be an issue for property investors. If you can pass your costs onto your tenants, then any increase in taxes essentially is their problem, not yours. With that said, the complexity of property taxes can lead to a lot of extra administration. Adding this to the other disadvantages of property may make investors decide to exit the area.
The traditional drawbacks of property.
The traditional main drawbacks of property are that it is capital-intensive and illiquid. Furthermore, investors are at risk of downward trends in both the overall market and the local area. There is also the reality that property has a lot of very specific management challenges.
Capital intensive
Buying a property ties up a lot of capital that could otherwise have been used elsewhere. It may require investors to take on debt that they are committed to repaying no matter what.
Illiquid asset
Even in red-hot markets, property transactions move at a relatively slow pace. If the market itself is slow it can take a very long time to sell.
Market risk
Historically, over the long term, the UK’s property market has been on a steady upward trend. Unfortunately, that does not guarantee that it will continue to do so. Even if it does there can be short-term flatlines, dips or crashes. Furthermore, these can have side effects that create additional challenges.
For example, if homeowners struggle to sell their homes, they may decide to rent them out, thus becoming “accidental landlords”. This increases the level of competition for property investors.
Location risk
The desirability of areas can change over time. Sometimes this benefits investors. Sometimes it doesn’t. It’s also worth noting that one of the traditional drivers of desirability was the availability of work in the local area.
If, however, remote-/hybrid-word becomes embedded then this could change the desirability of certain areas considerably. Smaller investors might therefore find it safer to sit out the market for the time being until there is more clarity on its future direction.
Management challenges
Over recent years, the UK’s residential property market has become increasingly regulated. This may have helped to drive rogue landlords out of the market. Unfortunately, it may also have been the last straw for legitimate small-scale investors.
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