With experienced investors diversifying into commercial and overseas markets to maximise yields and gains, Stuart Law asks is this the end of the buy-to-let market for now?
With significant gains in the prices of residential property over recent years and decreasing yields (rental income as a percentage of the property price) UK investors are re-thinking their strategies. Our research reveals that experienced investors are seeking to diversify into commercial property or established overseas markets, as they offer much higher yields than UK buy-to-let, and still have a good opportunity for price growth.
Assetz’ research shows that in today’s UK market there are only a few residential opportunities which still offer attractive enough yields to tempt new investors, such as regeneration areas like Ancoats in East Manchester, which are priced competitively and offer sound rental income prospects. Since 2001, yields have dropped from 8 per cent to around 5 per cent nationwide and this is just not enough to cover bank mortgage criteria in many cases.
The market has changed a great deal over the past eight months and residential buy-to-let is no longer the simple investment decision it once was where mortgages were easily covered by high rents. Today, if investors are looking for short-term capital gains then there are only a few real opportunities we can find for them.
Diversify the portfolio
Assetz is advising investors to diversify their portfolio and invest in commercial or selected overseas property. Commercial property can show gross yields of between 7-12 per cent of the property price compared to the much smaller yield from UK residential properties of around 5 per cent at present.
Commercial investment has often been seen as being too daunting and expensive for investors but with the option to invest in a syndicated/shared purchase, the minimum investment and risk is reduced and the yields are very attractive. There are also the additional benefits of long tenancy agreements and the tenant being responsible for maintenance of the building.
For example, a small high-street shop, which could cost £150,000, could return yields of between 10 and 12 per cent while a quality small office building costing say £500,000 could offer yields of 7 to 10 per cent per year – syndicate the investment and you could invest from £30,000, have the mortgage paid off in 12-20 years and then retain all of the rent as income.
Enjoying the investment
Another alternative property investment is the established overseas markets which offer investors an opportunity to not only see yields of 6 to 10 per cent but also to enjoy their investment by using it as a holiday home. This is certainly now getting much easier, with schemes more commonly available to ensure that the management of the property is handled effectively on your behalf.
However, investors must ensure that there is a true rental demand for a particular area and not base their judgement purely on rental guarantees as they often don’t reflect the natural demand for a country. Countries like Spain and France are the top two destinations for tourists in the world and this true demand helps rental yields and capital values – can you say the same about all of the emerging countries that investors are buying in today?
With many more choices available for property investors than just UK buy-to-let, it really is possible for them to build a high-income, diversified portfolio. Investors should start to use their heads rather than their hearts and diversify from speculation into investment if they want a sound alternative pension in property.
Stuart Law is managing director of Assetz
Example 1: Commercial property
Off-plan commercial office - £611,400 – offered with a prospective yield of 9.5 per cent pa. Once the tenant is signed up the building would be revalued for around 25 per cent more than the purchase price under a standard commercial valuation principle. In addition the rental income would pay off the mortgage after tax over approximately 15 years leaving a very healthy income of around 9.5 per cent of the purchase price and this rising over the years with rent reviews.
If the building were purchased with a 30 per cent deposit (£183,420 plus costs) the rental income would represent around a 30 per cent return per year on this. If this was purchased through a pension today then there would be no tax on the rental income and the mortgage could be paid off even faster, under 15 years. Syndicated purchase with a few like-minded individuals would allow access to this type of investment from as little as £30,000.
Example 2: Overseas property - French Residential Property in Cannes (Villa Marilyn)
Cannes is probably the most attractive town on the Cote d’Azur to invest in. With the annual two-week film festival drawing in huge numbers of celebrities and tourists, as well as numerous industry conventions held there every year, the rental market in Cannes is stronger than anywhere else in the South of France.
A one-bedroom apartment in Villa Marilyn costs around £116,000. With European mortgage rates at 3.3 per cent and a 15 per cent deposit, the rental income is enough to pay off the mortgage completely over 20 years or less. In addition, once the mortgage has been paid, the property will then produce a guaranteed rental income and provides excellent capital gains growth.
