From a portfolio perspective, real estate has managed to uphold its reputation as a shock-resistant asset, largely in part to the sector’s performance and ability to remain impervious in the face of risk.
Undoubtedly, the biggest indicator of this consistency is house prices, which have shown sustained and persistent growth over the last several decades. In fact, the average house price in 2022 is almost six times higher than it was in 1992.
Remarkably, this growth, which is demonstrative of a consistent upward trend over time, has endured enormous strains upon the UK economy, including the global financial crisis, Brexit and the pandemic – not to mention recent homegrown political turmoil. It’s an impressive record.
While there are other assets with a similarly impressive growth pattern in the same period, few have the same allure and interest as real estate. Largely, this is driven by the ingrained importance UK society places upon homeownership. This is as prevalent in individual aspirations, as it is in media and parliament where rising home prices provide a political fault line.
This perennial aspiration around homeownership has provided the UK property market with remarkable resilience, driving up the entire value of land and developments across the real estate sector. Although these constant factors are of great steady influence, the market itself is far from stagnant with major changes impacting the way investors participate.
Buy-to-let is stumbling
For decades the consistent mode of operation in the real estate sector was to develop a buy-to-let (BTL) portfolio. Investors would gradually accumulate properties, which would be renovated, maintained and rented out.
For landlords, the appeal was clear. Regular rental income (which has also shown consistent growth) essentially paid for mortgages while the value of the property increased over time. Moreover, compared to other investment options, property is relatively tax efficient. Indeed, mortgage interest and property maintenance have provided perfectly justifiable mechanisms for a landlord to reduce their tax burdens.
However, recent and varying changes to regulation and taxation have taken the gleam away from buy-to-let. These include an additional 3% stamp duty surcharge introduced for second homes in 2016; a tapered reduction in mortgage interest tax relief in 2017 (only to be removed in 2021); new HMO regulation; changes to a private landlord’s ability to evict tenants and an upcoming Bill that will abolish ‘no-fault’ section 21 evictions in the private rented sector.
Much of this regulation has been implemented for noble purposes: to give tenants greater security and to free up more homes for homebuyers. However, the changing and more stringent regulation has in turn impacted the appeal BTL holds for investors. Shojin recently conducted an independent survey among 690 retail investors, revealing the extent of the decline with 61% of investors saying they have lost confidence in the BTL market.
The rising star: Build-to-rent
Despite the fading popularity of BTL, real estate interest remains high among investors. Indeed, our latest research revealed 59% of retail investors consider real estate as a strong asset class with a further 51% citing the current supply and demand imbalance as a strong factor behind its appeal.
Interestingly, 40% of investors said they would be more inclined to invest in real estate if it weren't for the complications that accompany property ownership. This sentiment was even more widely shared by those aged 19-34, rising to 67%.
It is no surprise then that property investors are increasingly turning their attention towards Build-to-Rent (BTR) opportunities. As the name suggests, BTR refers to purpose-built housing designed specifically to rent rather than to sell, such as student accommodation and blocks of rental flats or housing developments.
The sector is growing massively – over the next decade, the number of completed BTR homes is projected to increase by a factor of five, reaching 380,000 by 2032 and an estimated value of £170 billion according to recent research by the British Property Federation and Savills.
Positively, the BTR market holds unique and far-reaching benefits for tenants as well. With an ingrained focus and sustainability and connectivity, build-to-rent properties tend to offer an enhanced range of services than traditional rented accommodation. Designed to foster a stronger sense of community for residents, these developments typically benefit from communal facilities and green spaces aimed at delivering a higher-quality lifestyle for residents. Moreover, their location in key urban spots not only addresses the most pressurised areas among the UK-wide housing shortage but provides a compelling investment opportunity with attractive yields.
In this lucrative space, there is good news. The BTR market is much more accessible than traditional BTL real estate opportunities. While access to such high-value institutional-grade property investment opportunities may have once been limited to only the wealthiest, the arrival of proptech into the mainstay of the real estate sector has born innovative fractional investment platforms that have opened the offer to the masses.
Fractional investment platforms allow investors to participate in the BTR market by purchasing what is, in essence, a ‘share’ of the property development. The holistic nature of property means that the individual ‘shares’ grow alongside the entire asset, creating thousands of wealth opportunities from one.
However, we must remember that it is the strength of real estate as a whole in the UK that has created such compelling wealth opportunities. By continuing to challenge the dynamics of traditional equity ownership through greater digital innovation, the investment landscape would benefit from a more even playing field, enabling investors to align their interests with a burgeoning sector that stands to make a significant contribution to UK’s housing numbers.
