Property continues to be a favoured asset class amongst individual investors. Owning a property offers a sense of control, and is far easier to understand than emerging market equities, technology stocks and hedge funds.
But with legislation gradually turning against landlords, and the uncertainty surrounding Brexit, is property still a sound investment choice?
Taxation
In recent years, several changes to tax law have made property investment less accessible, as well as less favourable to investors who already own property.
The main changes are:
- A 3% surcharge has been added to Stamp Duty for property purchases in England, Wales and Northern Ireland. This means that on a property valued at £200,000, the Stamp Duty payable would be £7,500. This is an additional £6,000 compared with someone buying their main home. This applies to holiday homes as well as buy-to-let properties.
- The surcharge is 4% in Scotland, taking the bill to £9,100 on a £200,000 purchase (£8,000 in addition to the standard Scottish rate of £1,100).
- It will no longer be possible to claim higher rate tax relief on mortgage interest. This makes rental income less attractive for higher rate taxpayers.
- The rate of Capital Gains tax is 8% higher when selling a property compared with other types of investment. And properties usually can’t be sold in phases to use up multiple years’ exemptions – the tax must be paid in a single year.
With proper planning and advice, some of the issues can be mitigated. For example, the Stamp Duty surcharge does not apply on homes valued at less than £40,000 or on commercial properties. A property company could be a tax-efficient option if purchasing multiple properties.
So, while buy-to-let may be less attractive to an individual buyer, the legislation is unlikely to deter corporate or professional investors.
Property vs Equities
There is no question that equity investments have continually outperformed property . Over the past 10 years, the Mixed Investments 40% – 85% Index (a reasonable indication of a typical balanced, diversified portfolio) has returned 102%. The UK All Companies Sector (to represent a UK share portfolio) has returned 137%, while the North American Equities sector has grown by 279%.
In contract, the Direct Property sector has returned 65% over the last 10 years, which is around 5.2% per year in income and capital growth.
Of course, property is not as volatile as shares, and most investors have a property in mind with strong potential.
On the other hand, property is not a liquid asset, and can’t be sold easily if you need to access cash, or if the market takes a downturn. Rental income is not guaranteed.
And most investors overestimate their own judgement. While a single property may be able to outperform the property sector, remember, every property within that sector has been chosen, vetted and purchased by a professional, experienced fund manager.
Investors have their own reasons for buying property, and the sector performance (when compared with equities) hasn’t always factored into the decision. But with the changing tax rules, it may be worth a second look to determine if you really want to invest in property.
The Political Landscape
With Brexit about to be finally resolved, confidence has returned to the market, with people starting to make the decisions they had been putting off.
While nothing is certain, Brexit may have the following impact on the buy-to-let property market:
- More properties could be up for sale as people feel better placed to make the changes they were planning.
- Construction and development may slow down, as companies evaluate how the changes impact on them. Brexit may affect overseas suppliers, import and export costs and the various laws that apply to the industry.
- More EU nationals may leave the UK, resulting in lower net migration into the country. This could lead to lower demand for rental properties, particularly in major cities.
- Depending on the source of the information, Brexit could either result in an economic boom, create a deep recession, or not much will really change. Leaving the EU will create both risks and opportunities. There are no guarantees.
- The government has promised significant investment in the North of England, which may improve job prospects and lead to a rise in house prices. While this could benefit the rental market, it may also increase demand for home ownership.
Buy low and sell high is still the goal with all investments, but as we can’t say with certainty when the highs and lows will occur, it is more of an aspiration than a workable plan. Any opportunities that arise in 2020 could take many years to come to fruition.
The answer is that no one can predict the future, even with the vast data resources all investors have at their fingertips. The key is to make careful, informed decisions for the future, rather than following trends or tips.
Our view is that property can form part of a diversified portfolio, but it is not suitable for everyone. If you are committed to property investment, remember that it is for the long term, and that a short-term dip in the market is not usually an indicator of long-term potential.
Please do not hesitate to contact a member of the team to find out more about your investment options.
