Investing in UK Property
Investing in UK Property
Of the different forms of investment available to UK residents, properties are one of the more popular. Investing in UK property is currently on the rise and for those who are considering the move towards properties, this may be the right time. However, if you have never invested in properties in the UK before, it pays to understand the basics and get the right guidance before you proceed.
UK Property Investment
Unlike the buying and selling of homes, property investment is focused on real estate that creates income. This normally means property that is rented either to residents or business owners to reside or set up a company respectively. Or, it can mean holding onto a property that increases significantly in value over time.
There is a subtle, but important difference between buying and selling homes and hanging on to property that increases in value. With the former, the idea is to sell or flip the property relatively quickly for a fast profit. This usually means buying real estate at below market value, then selling for a higher price within a few weeks.
Purchasing property for investment is not focused on the price it sells today, but rather its value building up over the years. This normally means properties that are in potentially high value areas that are predicted to rise in the next three, five, ten years or longer. This process is much slower compared to selling homes quickly, but each investment normally reaps considerable profits.
If you are considering investing in property, it pays to know which one is best for your investment needs. Keep in mind that both approaches will take time to fully realize, so you are investing to generate profits that may take years before you earn the investment back and then build upwards in terms of returns.
Types of Investment Property in the UK
There are seven basic types of investment properties in the UK. Each of them has their advantages and disadvantages. Understanding each type and how it works will help you make the best-informed decision about where you to put your money.
Investing in Residential UK Property
This is probably the most popular form of property investment in the UK. It’s so popular that its familiarity is such that many believe it is only one of two or three forms of property investing. Buy to let or rent is focused on individuals looking to rent a place to live.
This can be single-family units or multi-family units contained in a single building. If you have rented a place to live, then the owner of the property earns an income from what you pay each month.
- Earn Monthly Cash Flow
- Capital Growth Increases Value of Property
- Can Use Mortgage to Buy Property and Pay with Monthly Rent
With the latter, you can take out a mortgage to buy a property. Then, use the monthly income you receive to pay off the mortgage and reap a profit. But there are downsides to this form of investing.
- You Must Manage the Property
- Low Performing Communities May Hamper Rental & Capital Growth Efforts
Being a landlord is no easy task and the expenses can be considerable in maintaining and repairing rental properties for residential needs.
Investing in UK Property: Commercial
This is purchasing commercial properties and renting them to businesses such as stores, shops, or office space. This form of investment is structurally akin to residential renting but focuses on businesses. The advantages are considerable.
- Better Security Compared to Residential to Let
- Longer Leases
- Can Be Quite Profitable Depending on Location
Despite the positives, the biggest downside is that while people will always need a place to live, commercial property may not always be in demand. Depending on the trends, you may be stuck with a property that no one wants to set up shop.
Plus, it can be more costly to use a mortgage to purchase a commercial property. This makes it more difficult to get a good return.
Investing in UK Holiday Property
If you are interested in building up profits faster, then focusing on properties designed for holiday or part-time use may be the answer. Holiday properties are designed for short-term stays in popular places to vacation. While many think of properties along the beach or in a resort area, they can be anywhere when short-term rentals are needed.
There is a strong market for holiday properties which have given rise to the Airbnb website that lists the ones available to rent. The advantages of holiday properties are quite strong.
- High Profit Potential in the Right Location
- Tax Benefits
Tax-advantaged pension contributions and relief from capital gains taxes help make such properties popular investments. But there are some issues involved as well.
- Greater Maintenance & Cleaning Costs
- Long Periods of No Rental Activity
In other words, your property will need to be thoroughly cleaned after each visit. Plus, during the off-season there may be a long time between visits.
Investing in UK Property: Student Accommodation
This is quite like residential to let with the major difference being the property itself is designed for students of universities to live. Student housing is normally thought of as dormitories, but they can also be multiple occupancy housing. Many traditional homes can be rented to students who each take a bedroom.
Renting to students requires a university nearby to the property itself. But otherwise any property that can house multiple students is well-suited for this type of investing strategy.
- Universities Across the UK are Growing
- Easier to Afford Purchasing Properties with Students in Mind
The most obvious downside is that your property will succeed or fail based only on renting to students. This makes it difficult to continually rent out unless you are in a high-population area. Plus, it can be difficult to secure a mortgage for student-oriented properties as compared to standard residential ones.
Investing in UK Property by REITs
If you do not have enough money to purchase a property, you can instead purchase from a Real Estate Investment Trust (REIT). This is like purchasing stocks, but instead you purchase shares of a company that owns investment properties. There are considerable advantages to REITs.
- Purchase Shares of Different Properties
- Low Investment Requirements
- Easier to Liquidate
- Great for Diversifying Portfolio
Of course, there are downsides to REITs, particularly if you are looking for large, substantial returns on your investment.
- Limited Profit Potential
- Higher Risk Compared to Outright Purchase of Property
REITs are best suited for investors who only have a little money to start. By choosing wisely, such investments can build over time.
The next two types are different in that they do not involved renting the property to an individual or business.
Buy to Sell
This is a common type of investment in the UK. It’s also one of the simplest. You purchase property that you believe will have considerably higher value in the future. And you only sell when it reaches the expected value.
This includes purchasing properties that need upgrading, such as dilapidated buildings or residences that can be improved considerably which boosts their value.
- High Returns are Possible
- Many Locations are Suitable for This Type of Investment.
Plus, there is no maintenance, searching for tenants, or other duties associated with being a landlord. But before you invest, there are some downsides.
- No Guarantee that Property will Rise in Value
- Time Consuming Process
In other words, you may find yourself investing considering time in a property that turns out to be a dud. There is no way to know for sure until well after you have made the purchase.
This is akin to buy to sell, but the difference is that you purchase a property and build a building on it. Once ready, you sell the property at a much higher value. Developing a property may be the most desired of all property investing in the UK because it provides considerable freedom for the purchaser.
You can put what you want on the property without having to modify a previous structure. When properly researched, you can sell such properties for considerably higher than what you put in. If you did your homework, the rewards may be quite large as many companies are looking for new properties that suit their needs.
However, it takes a considerable investment to purchase and develop such properties. This is normally reserved for the experienced investor who has purchased properties before. It also takes considerable research and preparation to make the right call in what type of structure to place on the property.
Because if you guess wrong, then you are stuck with a property that nobody wants. It is why property development is arguably the riskiest of all investing strategies when it comes to real estate.
Investing in UK property is well-suited for anyone no matter their income level. Those with only a little money can start with REITs and build up their investments until they can purchase properties on their own. It takes time, effort, and the willingness to take risks, but investing in UK properties can be quite profitable with the right approach.
Zanthe Alexander Bentley is a finance veteran with over 25 years’ wealth management experience advising both family offices and institutions on their corporate finance requirements including capital raises (debt & equity), restructurings and M&A activities. He has significant experience in investment management and investment banking and spent nine years at UBS focused on convertible bond arbitrage and equity derivatives.
Prior to getting involved in Asset Management he expanded a small Spanish brokerage from a handful of staff in Barcelona to a diversified brokerage company with over 150 personnel spread across 9 countries, transacting deals from High Grade to High Yield Fixed Income and Loans; Structured Products through to exchanged traded equities.
After taking time to focus on family office activities in Asia, Zanthe-Alexander now leads an ambitious zero-leveraged fund providing exceptional growth and income to Sophisticated Investors.
Zanthe Alexander Bentley Twitter: https://twitter.com/BentleyZanthe
Investing in UK Property