Banking 101 -
Guide to Investing in Property and Real Estate
Find out how to invest in property in the UK with our strategy guide and explore our relationship-led banking solutions for real estate investors.
The UK property market is dynamic and diverse, appealing to both experienced investors and beginners considering how to invest in property for the first time. In this guide, we will cover:
- Why real estate is a good investment
- What to consider when investing in real estate
- Main routes into property investment and their pros and cons
- Real Estate Investment Trusts (REITs)
- How much money is needed to invest in property
Is real estate a good investment?
Historically, its performance as an asset class has been robust. As at last year, average UK residential property prices had increased by 67% over the past decade. While the picture for commercial property is slightly more mixed, investing in UK property can be an effective way to diversify your investment strategy.
Read more: Funding your buy-to-let
Of course, there are risks, as with any investment, and you need to decide which investment model suits you.
How to invest in real estate:
There are a few different ways to invest in property, and understanding the different strategies is crucial to deciding what is suitable for you.
You can invest in a property directly and become a landlord. If direct investment is not for you, you can also invest in a real estate company or real estate investment trust (REIT).
When considering your options, there is the question of involvement. Do you want to be personally involved in property management and invest directly, or would you instead outsource to an investment manager who would deploy your capital into a property portfolio and manage it on your behalf?
1. Invest directly into property
Many people invest directly into property; they own the property themselves and are responsible for maintenance as well as legal practicalities.
- Direct property investment could be your primary residence or even a second property, whereby you and the family can have a countryside bolthole to enjoy. When purchasing for personal use, there is no rental income on the investment, but one would hope for capital appreciation of the property value over time.
- For most, direct investment in property comes in the form of owning a residential buy-to-let property or a portfolio of buy-to-let properties. This has the specific aim of generating a return in the form of rent and capital appreciation via house price inflation.
- In recent years, holiday let properties have also become very popular. These short-term lets tend to provide higher rental income but are also more costly and time-intensive to operate. There are also some tax incentives for operating these properties if they meet specific requirements.
- If you have sufficient capital available, you can also consider investing in commercial property. These can potentially be more lucrative than residential property and come with longer leases in place. They do not always follow the same trend in terms of the capital value that residential property has.
If your goal is to achieve a specific annual income from your investment, you need to do your research.
- Where are you buying? Is there demand in that area for this type of property?
- Who might want to rent the property; do you need to make any modifications?
- What structure should you buy and hold the property in?
- Most importantly, what is the potential rental income, and how will you ensure rental income always covers the interest cost on any loan you take.
Read more: Ten Mistakes Landlords Make
If you are looking to purchase your main home, buy a second home, a holiday home or have buy-to-let lending requirements, speak to a member of our private banking team.
2. Invest in property companies
Many of those researching how to invest in property often decide that direct real estate investment is not suitable for them. This may be for a variety of reasons, including:
- High entry costs – they do not have sufficient capital to buy a property outright
- Management risks – time or money involved
- Tenant and rental risk – concerns around affordability if a tenant were not able to pay their rent (or could not be found)
- Liquidity risk – they may need to access the capital at short notice in the future.
However, these investors may still want to have exposure to property as an asset class to diversify their investments. The investor may consider buying a real estate fund or a collective investment in this instance.
3. Buy shares in companies involved in the property sector
This may include shares in property construction companies such as Taylor Wimpey or Bellway and estate agency firms such as Savills or Foxtons.
The risk of investing in single line stocks is that you have a greater level of concentration – your portfolio will be more sensitive to the fortune of those specific companies, which may not always correlate to the sector as a whole.
Just because a sector is booming, it does not mean every individual business is.
Direct Property Collective Funds
Several funds invest in direct, physical properties.
The advantage of these assets can include:
- Regional diversification – There are typically many properties owned across the UK or even across European or Global markets.
- Sector diversification - This will give you exposure to multiple properties across different property sectors, i.e., retail, industrial, and office.
- You can access the funds with a relatively small investment.
- Liquidity – in ordinary market conditions, these funds are usually easily bought and sold, and you can access your investment in a matter of days*.
- Reduced costs – you have no upfront costs such as legal fees or finance fees, and in addition, the management of the underlying properties benefits from economies of scale.
It is worth highlighting, however, that the fund itself will usually charge a management fee which will ‘eat into’ the returns seen on the investment. In addition, depending on the style bias of the fund, it may be at an advantage or a disadvantage depending on the market movement.
For example, if the fund is heavily invested in retail properties, it will have suffered in recent years as we have seen the decline of the high street. Similarly, logistics assets such as warehouses near large cities have outperformed in the last few years as we see the increasing prevalence of online shopping.
In addition, in difficult market conditions, direct property funds can find it difficult to raise sufficient cash to meet their requirements (as property takes time to sell even on the institutional market). In these instances, these funds can ‘gate,’ which may mean that you cannot access your investment.
*Please note that the Financial Conduct Authority is currently undertaking consultation as to whether direct property investment funds will need to impose a mandatory longer liquidity window of 90 or 180 days which would impact the liquidity of the investment.
4. Invest in REITs
What is a REIT?
A REIT is a Real Estate Investment Trust and is similar to direct property funds; it is a company in which you can buy shares, and the underlying business is to purchase real estate investments. As with direct property funds, REITs may specialise in specific sectors or regions. For example, Supermarket REIT buys, unsurprisingly, properties that are leased to supermarket chains. Shaftesbury REIT owns a large proportion of Chinatown and Covent Garden.
REITs are listed on a stock exchange. The advantage of this is that it makes the investment very liquid, it is easy to buy and sell. The disadvantage is that the investment will behave like equities in the short term and will be more volatile than direct properties - this is an important consideration when it comes to diversifying your portfolio and risk management.
How much money is needed to invest in Real Estate?
When investing directly in real estate assets and buying the physical properties, the answer will depend on the type of property you are looking at, where it is located, and the rental opportunity it provides.
A high street retail property will cost a lot more to purchase on London’s Oxford Street than in a small village.
You want to make sure you do not over-leverage yourself and that there is enough headroom in the rent vs mortgage costs to allow for any short-term voids between tenants.
Most portfolio landlords do not exceed 65% Loan-to-Value when considering new purchases.
You should also make contingency arrangements for longer-term void periods and ensure that you can service your loans.
Read More: Raising Finance to Invest in Property.
When investing indirectly, you can start at a much lower initial investment with many property funds and REITs being available for less than £100 per share or per unit. The minimum investment here will typically depend on the limits and minimum trade sizes for the investment and custody platform that you are using.
Whether looking at direct or indirect routes, you should always consider real estate investments as part of a broader, well-diversified investment strategy rather than putting all your eggs in the property basket.
For example, property generally makes up 5-10% of our medium risk discretionary investment portfolios.
Before you make any decisions about investing in real estate, it is essential to balance this against your wider wealth plans and personal and financial objectives.
Our investment management service is designed to deliver your financial goals using a robust framework that leverages our collective investment committee approach.
Our Commercial team is here to meet the day-to-day banking needs of owner-managed and independent businesses.
This communication should be considered a marketing communication. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research. It is for information purposes only and does not constitute advice, a solicitation, recommendation or an offer to buy or sell any security or other investment or banking product or service. You should seek professional advice before making any investment decision. The value of investments, and the income from them can fall as well as rise, and may be affected by exchange rate fluctuations. Investors could get back less than they invest. Past performance is not a reliable indicator of future results. The tax treatment of investments depends upon individual circumstances and may be subject to change.
The contents of this communication are based on opinions or conditions as at the date of writing and may change without notice. To the extent permitted by law or regulation, no warranty of accuracy or completeness of this information is given and no liability is accepted for its use or reliance on it.