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Financial advisers - is property a sinking ship?

Journalist: Jane Matthews, FTAdviser

ended 17. November 2022

Hello newspagers! 

I'm eager to hear from financial advisers/planners please.

I'm curious if you have been telling your clients to steer clear of rental property as an investment after the turmoil we have seen in the last couple of months? 

Some I speak to have said they have been telling clients to abandon ship - have you been doing the same? Or does it still hold a place in a balanced portfolio?

I'm also curious to hear your own personal experiences - if you are a landlord too what's your outlook? Is it sustainable, is it more hassle than it's worth? Maybe it's actually going great?

Separately, do any of you have concerns around the ethics of purchasing homes and shelter as an investment given the well documented issues with the rental sector and the difficulties FTBs have getting on the ladder? 

Would love to hear all your thoughts/experience/opinions.

Many thanks, 
Jane 

5 responses from the Newspage community

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David Robinson
Co-Founder at Wildcat Law
Avoid it like the plague, unless you really know what you are doing. To use a classic British understatement, residential property, like the Manchester United dressing room, is facing some difficult times. Most property portfolios have benefited from cheap debt, but those days are gone. Instead many landlords face the harsh truth of over-leveraged properties costing significantly more due to rises in mortgage interest rates. Ordinarily they would pass any cost rises onto tenants but the rate of increase is far beyond what they can pass on or that tenants can afford. This is causing many a landlord to look to sell up, or at the very least stop any plans to buy more properties. In 2023 there will be some opportunity for investors, as house prices fall significantly in some areas. However, the investors likely to be able to benefit will be cash buyers or those who only require low levels of finance. The days of the amateur property investor buying a run down property to do up, rent out or sell on for a significant profit, are gone, for now at least.
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Rob Peters
Principal at Simple Fast Mortgage
The fundamentals of investing tell us to buy low and sell high, and there is a sound argument to say that we could be entering one of the best property buying opportunities in a decade. Ultimately, the biggest gains are made when many others are running scared. The rules of the property game have evolved significantly in recent times and those landlords who bought property in their personal name, and remained highly debt leveraged, will certainly be feeling the pain of higher interest rates, low tax efficiency, and asset inflexibility. But a new wave of savvy modern property investors are lapping up golden opportunities neatly wrapped up in tax-efficient, flexible SPVs. They are seeking out properties where opportunity exists to increase capital values and yield, and after an initial investment phase, will extract much (if not all) of their initial investment and move on to the next project. They are creating diversified income streams and generational wealth from the UK property market, one of the strongest and most consistent performing assets classes that has existed in modern times.
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Samuel Mather-Holgate
Independent Financial Adviser at Mather and Murray Financial
Any well-diversified portfolio should have some property exposure but for most people, directly buying a property is over exposing them to one asset class. On top of that, most people leverage that exposure by getting a mortgage, e.g. if you put a 25% deposit down and the market crashed 25%, you've lost all of your investment on paper at least. The government have made it progressively harder for buy to let landlords to make a profit. First there was the second home surcharge where you have to pay 3% additional tax on the purchase price relative to any other buyer. Then they introduced a new tax regime where higher rate taxpayers couldn't offset all of their mortgage costs. This pushed landlords into having to set up companies with mortgages at higher rates to allow them to offset the costs of their investments. However, by Thursday I expect the government will have cracked down on this too, by putting up corporation tax rates and the rate you extract money out of the company. All in all, you have to find a very special property to make direct property investing work as a practicable solution. If you want exposure to the UK property market, there are plenty of 'Real estate investment trusts', or REITS, that you can invest in that mainly focus on commercial property. Some of these are yielding very high numbers at the moment as property prices are depressed due to the recession we see ourselves in, but things will recover and you will see both capital appreciation of the fund value as well as a steady dividend yield.
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Philip Dragoumis
Director and Owner at Thera Wealth Management
We have always advised clients to avoid investing in property unless they have some kind of meaningful edge as part of their work. Long term the returns are similar to a diversified portfolio of global equities but there are many drawbacks. Capital gains from residential property are taxed at higher rates than funds or equities, and are not allowed to be included in tax free/tax relieved or tax deferred wrappers such as ISAs, pensions and offshore bonds. Once you add in high transaction costs, stamp duty, legal costs, voids , property management costs then returns are squeezed even further. Property is illiquid and cannot be bought or sold down in fractional shares if you need to invest or draw down cash regularly. It is also very much a hands on investment. Your mutual fund will not call you in the middle of the night if the boiler breaks down. Property investment is very much a business. The sector is also unregulated, there is no FSCS compensation and scams are plentiful. Yields now don't compare favourably with cash or bonds any more after the interest rates hikes this year. If you know what you are doing, are hands on and prepared to wait many, many years then it may be lucrative but for the vast majority of us, this is not the case. Unfortunately, people feel that property is more easy to understand than stocks or shares, which means it continues to remain very popular.
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Adrian Kidd
Chartered Wealth Manager at EQ Financial Planning
Investment property is increasingly viewed like the 60/40 portfolio, namely as dead as a dodo. Property is easy to understand for the majority of people and they like its tangible attributes. Some believe it's real versus a computer screen showing you you have £500,000. So, my strategy is to find out the investments that clients truly believe in and can hold long-term and then invest accordingly. It's true it's less attractive to buy now than it was 15 years ago, and from a tax efficiency perspective it's worse than a pension plan or ISA, but we shouldn't let the tax tail wag the investment dog. If there is a plan and it has been properly worked out what is needed as an outcome, property can hold its place in a suite of financial assets to help people achieve their long-term financial goals. As for any ethical issues, I don't see any. There is a lack of housing stock due to an inability to build the homes we need that has been a government target for 10-15 years now.