The UK’s property demands are changing, and investors need to respond appropriately, says Tom Brown, Managing Director of Real Estate at Ingenious
For many years, the typical approach to property investing has been through longer-term investments in buy-to-let and equity. While this ‘bricks and mortar’ approach has worked well for many investors, a fully valued market in both the residential and commercial sectors means that capital appreciation opportunities are now looking limited. Instead, investors should be looking to work their property assets through shorter term loan opportunities which are used to fund the development or redevelopment of buildings, helping to close the supply gap that exists across the market.
Why is the UK property market experiencing change?
In the residential market, changing demographics, affordability and the availability of funding are driving a widening gap between supply and demand with an average of 217,000 new homes being built each year against a demand for over 300,000 – a figure that hasn’t been achieved since the 1970s.
Other longer-term lifestyle shifts are also having a significant impact on the real estate market. The way people live and work is becoming less structured and standardised, and there appears to be less desire for people to be held down by long-term commitments. Coinciding with the advent of the ‘gig’ economy has been rising numbers of self-employed and contract workers, suggesting a more mobile and flexible workforce.
The effect of this can be seen in the shortening of commercial property lease lengths and the prevalence of break-clauses in new leases as tenants increasingly seek flexibility. The retail sector has been hit the hardest, given declining footfall in town centres and the shift to online retailing. Indeed, the second quarter RICS survey showed falling occupier demand in retail, a higher vacancy rate, flat to falling rental growth, and negative capital value expectations over the next twelve months.
New opportunities are emerging
Despite these trends, new investment opportunities are opening as developers adjust their product offerings to meet these evolving economic conditions and lifestyles. ‘Co-living’ is an area of particular interest and future growth. These residential developments, which currently are mainly focused in London, cater for young professionals’ more mobile lifestyles. They offer the convenience of all-inclusive costs, covering rent and bills as well as services such as cleaning and gym membership. This type of living arrangement combines a ready-made community with individual privacy, features that could also be targeted to people in later life who are downsizing though not yet in care and who would welcome the dual aspects of community participation and privacy.
However, it is not just the investment potential that these types of developments hold for investors. The instant communities provided by co-living and other purpose-built rental developments may also hold wider economic benefits that could help the struggling UK high street by stimulating demand for service-type businesses like bars and restaurants. This in turn may lead to potentially greater demand for existing vacant office and retail units.
How can investors take advantage?
With banks and building societies retrenching from lending in the post-financial crisis years, new opportunities have arisen as developers look to secure funding from a diverse range of sources to support the growth demands of the market. This has created a significant need for alternative lenders who provide development and bridging finance on high quality projects offering potentially attractive, asset backed returns.
Ingenious is one such lender. Since 2013, the real estate division has provided over £350 million of loans across more than 50 projects, supporting the construction of over 2,000 residential and commercial units. This strategy is overseen by a dedicated team of real estate finance professionals with more than 100 years of collective experience in the field. The team’s vast experience and network of relationships across the sector mean it can be selective in which opportunities to support, closing on average only 5%–10% of the deals they consider.
The latest Ingenious offering, the Real Estate Growth Service, aims to deliver annual returns of 5%-8% net of fees by providing development and bridging finance to experienced real estate developers and secured against residential and commercial developments in locations across the UK. The Service’s objective is to provide an attractive, asset-backed return while preserving the value of an investment. Annualised growth for the quarter ending 30 September 2018 was 8.4% net of fees.
While the Service offers the potential to qualify for Business Relief and therefore be exempt from inheritance tax after two years, if shares are held for a period of three years or more then the investment should also qualify for investors’ relief, which means a reduced rate of 10% capital gains tax on the disposal of shares. Investors’ relief was introduced by the government in 2016 to encourage investment and entrepreneurial activity in the UK, particularly in areas with a shortfall of investment such as the housing market.