It’s interesting to see which investments are in favour as time changes.
For a long time, property was the darling of the investment world. Buy-to-let investors amassed substantial property portfolios, using ‘other people’s money’ to generate additional monthly income, as well as the prospect for capital appreciation.
Because there’s something tangible about owning property and it tends to be a familiar asset class, for many investors it feels simpler to invest in a buy-to-let than to construct a portfolio which includes fixed-interest securities (otherwise known as bonds), and company shares or equities.
However high property prices and the threat of rising interest rates, combined with recent tax changes for landlords, could mean property is no longer considered by many as a good investment.
Some new research shows more than half of UK investors no longer consider property to be a good investment. The survey of more than 1,000 UK investors and 500 high Net Worth individuals was commissioned by a well-known UK investment management company. One of their investment directors said:
“It seems recent changes to the tax and regulatory treatment of buy to let has caused investors to take a step back and assess the viability of these investments.
“Whilst it’s understandable that property, and in particular residential property, has been a popular investment in the past, it’s now making less sense. Not only are the returns now being impacted by an increased rate of tax, but they can also prove high risk investments due to a lack of diversification. Property investments require a large amount of capital to be held in one single asset and landlords will often hold a number of properties within one region.
“Investors who are looking to invest in property, should make sure to assess their risk appetite, look at all alternative options and make sure this property is held within a well-diversified portfolio of investments.”
The negative sentiment towards buy-to-let property as an investment was driven by some recent changes to the tax treatment of rental homes. This combined with the introduction of new regulations by the Prudential Regulation Authority (which affect portfolio landlords), have prompted many property investors to re-evaluate the overall cost-effectiveness of property as an investment.
The tax changes for property investors have been particularly unpleasant. In April 2016, the government introduced a stamp duty surcharge of 3% on additional property purchases. They have also reduced the tax relief available to buy-to-let investors, with this tax-relief set to be removed entirely by April 2020.
The survey also found that investors with more than £100,000 of investable assets – defined by the survey as High Net Worth individuals – were slightly less bearish about property as an investment. In fact, only 38% of these wealthier investors no longer view property as a good investment.
A quarter of High Net Worth investors already own buy-to-let properties, however only 7% had plans to increase the size of their property portfolio.
Separate research carried out by the National Landlords Association at the start of this year revealed that 20% of its members planned to dispose of part of their property portfolio in 2018.
Despite high market valuations and less attractive tax treatment, investing in property can still play a role in your financial planning. It’s important though to first understand the advantages, disadvantages, risks and potential rewards of property investment.
Before deciding which investment asset to choose, it makes sense to build a lifetime financial plan. Always start with your desired lifestyle and with the help of a qualified financial planner, consider the options which are available to help you achieve your goals and maintain your lifestyle.