guaranteed rent for landlords | Time to invest in housing?
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The residential property market was thrust firmly into the spotlight in this year’s Budget, with the Chancellor announcing a welcome boost for prospective homebuyers, alongside support for building projects.
The Help to Buy scheme, aimed at stimulating the market, will provide guarantees to support £130 billion of mortgages for homebuyers struggling to raise a deposit, and a further £3.5 billion in shared-equity loans to buy new-build homes.
The news was welcomed by housebuilders as the market anticipated a jump in sales, sending their shares higher, with holdings in Barratt Developments (BDEV) up 7%, while Taylor Wimpey’s (TW.) rose by 6%.
For investors to take advantage of a boost in the housing market, it’s no longer the case that you need to own bricks and mortar to seek income and gains from the residential property market. Instead there are now products available that enable them to take a punt on any future price rises.
However, investment advisers urge caution when considering dipping a toe in investment products linked to the UK housing market. Gavin Haynes, investment director at Whitechurch Securities, stresses that most investors already have enough exposure to the property market through their own homes, while those who want to increase exposure typically favour the buy-to-let route.
Yet Darius McDermott, managing director of Chelsea Financial Services, says these products can provide more diversification than buy-to-let as they don’t rely on any one location. So how do they work?
There are two choices that can be held in tax-efficient ISAs, self-invested personal pensions (SIPPs) and junior ISAs: the Castle Trust HouSA and the TM Hearthstone Residential Property fund.
The biggest and best known is the £37.36 million Hearthstone fund that launched in July 2012, which produced a gain of 2% for investors in the first six months. The minimum investment is £1,000. It invests in new builds across the UK, from one-bed flats to five-bedroom detached houses and penthouses, and these are rented to private individuals and families under assured shorthold tenancy (AST) agreements and corporate lets, with rental income retained in the fund.
The fund, which is a property authorised investment fund, so investors can get gross income with no corporation tax deducted, has an annual management charge of 1.5% and a pricey 2.7% total expense ratio. However, this includes a lot of management fees that a buy-to-let landlord would face, such as agent fees, leases, insurance, repairs, and gas and electricity safety certificates.
At present, few investors hold residential property as part of their investment portfolio. Patrick Connolly, a financial planner at AWD Chase de Vere, says: “In the past those looking to expand into residential property have tended to buy individual properties and let them out, but this approach has a number of pitfalls including high costs, little diversification, poor liquidity and often a great deal of time and inconvenience.”
The Hearthstone fund buys properties outright, which means it avoids gearing. McDermott says: “Hearthstone also had backing from some good, big companies like Bovis Homes (BVS) who have put seed money into the fund, making it an appealing way of getting exposure to the buy-to-let market without the hassle of doing it yourself. However, the yield, after charges, isn’t big enough for my liking at just 3%.”guaranteed rent for landlords
The other option, Castle Trust’s HouSA, is a residential property index tracker based on the Halifax House Price Index (HHPI), which can be taken out for three, five or 10 years, and has an income and growth option. It was launched in October 2012, with a minimum investment of £1,000 and an initial fee of up to 3%.
However, while it is meant to be a simple option to track the housing market, the devil is in the detail, and investors should remember they will lose money if the Halifax index ends the fixed investment period lower than it began.
The Income HouSA is a corporate bond that aims to pay annual income varying between 2% over three years and 3% over 10 years, with a capital return equal to 100% of any rise or 100% of any fall in the HHPI. Alternatively, the growth fund, which is a listed equity, aims to deliver returns equal to 1.25 times any percentage increase in the HHPI over three years or 1.7 times the index over 10 years. If the index falls over the fixed term, investors’ losses will be 0.7 times the percentage fall over three years, or 0.3 times the index fall over 10 years.
Regulated investments
A benefit for nervous investors is that both Hearthstone and Castle Trust products are regulated by the Financial Conduct Authority, and protected by the Financial Services Compensation Scheme, which guarantees up to £50,000 if the firm holding the investment fails.
While some investors may be bullish about the housing market’s prospects, Martin Ellis, Halifax’s housing economist, points out that over the past decade the stockmarket has significantly outperformed house prices. He says: “The FTSE 100 (UKX) is up by 78% compared with a 33% rise in UK house prices.
“While both share prices and house prices rose rapidly between early 2003 and the summer/autumn of 2007, they fell sharply until early 2009 with the FTSE 100 down 43% from its peak, compared with a 23% decline in house prices.
“The stockmarket has bounced back strongly since 2009 with the FTSE 100 now only 5% below its pre-crisis peak. Meanwhile, house prices have risen more modestly, but remain 18% below their August 2007 peak.”guaranteed rent for landlords
The economic outlook makes the future uncertain, although the Centre for Economics and Business Research believes house prices will pass their pre-recession peak next year, and by 2018 the price of an average home in the UK will soar to £267,000 – a rise of around a fifth compared to today.
However, gains in London and the south east can distort the national average. For example, the Office for National Statistics’ house price figures show that London saw gains of 5% last year, with the south east at 3%, but the national average only rose by 0.8%.
Meanwhile, some investment experts, such as Adrian Lowcock, senior investment adviser at Hargreaves Lansdown, believe the new government scheme suggests prices are already too high. He says: “The need to introduce this scheme in the first place suggests that prices are too high, and new buyers cannot afford a property while existing owners don’t sell and move up the ladder due to worries about taking on more debt.
“The scheme is temporary, and provides a short-term stimulus, but if residential property is over-valued then it is just delaying the problem.”
For investors who do consider the HouSA, McDermott recommends going for a long-term option. “The 10-year tranche is more attractive, but illiquid – so if you go into the 10-year tranche and your circumstances change and you need your money, you can’t get it. They say you may be able to but they can’t promise, so investors would be best off presuming they can’t if they do decide to invest.”
There are more potential rule changes on the horizon that could prop up the housing market, with investors probably being able to use their pension to benefit. In March’s Budget the government revealed it was considering a relaxation of the rules to allow unused commercial property to be converted to residential use within a SIPP. This could prompt a renewed interest in the sector.
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