Investment Property: What Is an Investment Property?
Investing in property has for a long time been considered an intelligent investment strategy. Property investment provides investors steady and passive income, long term financial security and equity build up, along with many other benefits.
An investment property is a real estate property that has been purchased and/or acquired with the intention of earning a return from it. Investors obtain their return either from renting out the property and collecting the income or from reselling the property at a higher value.
Investment Property UK
Everyone seems to know that if one wants to make real money then it is necessary to make some shrewd investments and there are none so shrewd as putting one’s money into investment property.
Take a look at any newspaper or magazine rich-list and what jumps out at you is the fact that a significant number of the people featured in these lists made their money in investment property.
The implication is clear; if you are not a software wizard, a coding genius nor a successful serial entrepreneur then the property market is your best chance of making a fortune.
The reasons for this are many but essentially boil down to a few significant factors.
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Residential Investment Property
Firstly, the investment property market was built on the demand for residential properties, as the UK population steadily grew the demand for homes increased but this consistently growing demand for housing was not matched by a similar increase in the construction of new homes.
The introduction of the buy-to-let mortgage in the mid-nineties triggered a wave of investors who saw UK property as an untapped pool of potential investment returns. For 20 years or so they were right - a report published in 2015 by economist Rob Thomas outlined how the returns on buy-to-let property investments had beaten those from every other major investment asset class available since 1997.
So, the combination of an in-demand asset combined with easy financing options fuelled the buy-to let explosion. Of course, the fact that this was all underwritten by a physical, bricks and mortar asset that, unlike investing in stocks, shares or other intangibles, was a much lower risk, but offered steadier and more predictable returns also helped make this type of investment extremely popular.
The Investment Property Market Has Changed
Whilst there have been changes in the property investment market, property is still a solid investment, backed by a physical asset. Like any opportunity or development, it is the early adopters who benefit the most and the buy-to-let investment property market is a case in point.
As mentioned above it has been calculated that residential investment property was the number one returning asset class for the best part of two decades, however that is no longer the case as profit-killing legislation has made the residential investment market much less profitable and therefore less attractive to many investors.
Whilst residential property values have increased significantly over the last 3 to 5 years but rental income has not kept pace, and this has led to lower income yields and a lower overall return on capital invested. The full impact of Brexit is not yet known but there is widespread fear that residential property values could fall leading to capital losses for investors.
The government introduced Stamp Duty on second residential properties, and this is now a significant investment cost. The landlord is also usually responsible for maintenance and repair costs and there is also the problem of finding a reliable and responsible tenant who will pay the rent on time.
As property investors exit the residential housing market, new alternative investment property markets have developed, less well-known perhaps, but able to deliver even better returns than the old buy-to-let market.
So, to summarise, historically, buy-to-let has been a very popular investment. However, with the recent changes to the Buy-To-Let regulations and the government clamping down on landlords, as well as the uncertainty of how Brexit may impact residential property values, many investors have exited the buy-to-let market and invested their money elsewhere.
Investment Property – What Are The Options?
As buy-to-let became too saturated and over-legislated for the taste of many investors used to receiving good rental returns, as well as significant capital growth on their investment properties, new concepts of what constitutes an investment property have resulted in the creation of new property investment sectors.
Whilst most investors primarily considered residential investment properties, in recent years, new, commercial property investment opportunities have become available. These include hotel room investments, student accommodation investments and care home room investments.
Purpose-Built Student Accommodation (PBSA)
PBSA is exactly as it sounds – housing units for university students.
PBSA developments are designed and built for the specific needs of students. They include a variety of facilities such as games rooms and gyms for the perfect balance of studying and socialising. They are
located in prime areas that are close to the university campus as well as city centres and local amenities.
They include cluster flats and studios, plus each PBSA may offer a unique set of amenities such as laundry, shared kitchen and other communal spaces. PBSA’s were primarily owned by the universities; however, some private developers have penetrated the sector as well, which provided a rare opportunity for investors to get into the market.
Student Numbers in The UK Are Soaring
In 2015 UK universities removed the intake cap, allowing more students to be accepted onto any course, seeing a record 540,000 new students enrolled in 2015/16 according to UCAS. This was the third consecutive year that student numbers have been rising.
There has also been a rise in international students, which means that many overseas students (EU and non-EU) are attending UK universities. These overseas students are more likely to spend a bit more on rent for a PBSA.
The trend has continued as “The total number of HE students stood at 2,343,095 in 2017/18, an increase of 1% from 2016/17.”
Universities as a result have an acute accommodation shortage, causing housing laws to funnel students into PBSA. This is a great indicator for a profitable property investment.
PBSA Was The UK’s Best Performing Property Asset
PBSA quickly became the UK’s leading property investment sector because it is was a dependable asset that is recession-proof and assured. Because student rents have increased by 3% annually over the last 15 years, the investment promises high yields.
PBSA was voted the World Class Asset by the Wall Street Journal because:
- It has a £6.5 billion expenditure (2015)
- It is a top performing asset in the UK for returns (JLL)
- The UK student property market was valued at £200 billion
However, like any gold-rush, space becomes saturated very quickly and whilst there is still a general under-supply, in major university cities such as Manchester and Sheffield the profitability of PBSA as a long-term investment is questionable due to the sheer number of units being built.
Care Home Investment
A retirement home or care home investment is a specialist commercial property investment that is a fairly new concept in terms of private investment for profit.
Retirement communities in the United Kingdom are selling individual studios within their developments in order to obtain funding for future facilities
In recent years the UK’s population has experienced an increase in elderly people over the age of 65 and due to this fast-growing demographic of individuals over the age of 65 in the UK, nursing homes are experiencing a rising demand for beds, resulting in the need for capital to fund more development projects. The private sector has turned to this method of investing to overcome the lack of government funding available.
This is due to a number of factors but the most obvious one would be the increased life expectancy, resulting in a higher number of retirees and pensioners in the UK.
Because of the high numbers of people needing specialist care at an old and vulnerable age, the demand for care home communities and retirement homes has also increased.
It is estimated that out of the 65 million people in the UK, 18% are over 65 – a record number in UK history and at present there are not enough care home places for all that need them – and this situation will only worsen as even more of the population pass the 65 years old mark.
Although there are newly developed care homes opening, it isn’t nearly enough to cover the huge demand. This is important for the investor because this asset class is still in high demand with little supply, making it a lucrative investment.
Risks of Care Home Investments
Whilst the forecast is for long-term demand combined with a chronic under-supply of care home beds makes the sector look like a guaranteed winner for investors there is a note of caution to be sounded.
The care industry is a heavily regulated sector with high standards of training and delivery required. The regulator, the Care Quality Commission, wields a lot of power, including the ability to close down care homes that fail to meet the rigorous standards demanded of UK care providers.
Once the CQC consider a care home to be substandard and close it down, investors find themselves in a very tight spot as once the care home is unable to generate income then investors returns are stopped and ultimately the property becomes dormant.
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Hotel Room Investment Property
Investing in hotels is not a particularly new idea, however the option of buying an individual room, receiving a title deed and then leasing that room back to the hotel for a pre-arranged return is a new concept.
The model is sound because it benefits both ends of the transaction, with hotels able to raise capital quickly and relatively cheaply in order to re-invest and upgrade their property, which intern allows them to increase room rental returns and investors getting very good returns by putting their money into an investment that is as secure as it is possible to find.
Further plus points for investors in hotel room property are the facts that the capital required to purchase an individual hotel room is much lower than that required for investing in a hotel itself and that a hotel room investment is a fully managed investment, offering individuals the opportunity to collect passive income whilst the day-to-day running of the hotel is carried out by the same professional teams that have always been installed in the hotel.
Finally, it is important to note that additionally, hotel room investment properties do not require investors to pay a stamp duty charge. A Stamp Duty on investment property is limited to residential properties. Since the aforementioned investment in hotel rooms does not fall in this category, investors are exempt from paying the additional charges making the investment all the more attractive.
Why UK Hotel and Leisure Sector is Experiencing Growth
Much like the demand for student property and care home rooms the hotel room investment sector is driven by the increased demand for hotel rooms in the UK, which itself is based on a number of factors.
Firstly, the rise of the staycation has meant that many people are now forgoing foreign travel and overseas holidays in order to holiday in the UK. One of the major drivers of the ‘staycation’ phenomenon has been the decline in value of the pound sterling, combined with the lack of growth in UK wages that have rendered overseas holidays too expensive for many Brits.
In turn, the falling pound has made the UK a more attractive destination for visitors from overseas, meaning that the growth in demand for UK hotel rooms comes from both within and from outside the UK.
Accelerating this is the prospect of Brexit, which is likely to result in further declines in the value of the pound as well as more red tape for overseas travel.
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Investment Property Review
Each of the options can make a good investment property because they offer investors the opportunity to get in at a lower price than if they were buying a residential property, they also reduce the workload and responsibility of the investor, and allows for a higher return compared to other investment options.
In addition, in each investment strategy mentioned above, investors will own the property according to the Land Registry but will then lease the property out to the identified source (hotel, university, or retirement home) – this creates a simple opportunity for investors to earn passive income with minimal involvement.
Investments in all three sectors are fully managed by professional on-site teams, making the investments hassle-free, ideal for overseas investors and busy landlords.
The management team sustains both occupancy levels and conducts all maintenance so investors are not required to get involved in any of the running of the properties.
A Professional Onsite Management Guarantees Easy Income
Investors will receive a true net income because management costs are factored into the fixed yield contracts. This is especially attractive compared to traditional residential buy-to-lets and HMO’s.
Investors don’t need to stress over the sourcing of tenants, the collecting of rents, dealing with late payments, ongoing maintenance and unforeseen costs because the management company will deal with all the traditional landlord responsibilities on behalf of investors.
Ultimately these types of investment properties allow people to be a true investor earning passive income rather than a busy landlord who exchanges time for money!
Stamp Duty on Investment Property
Stamp Duty is a tax that is payable to the government when purchasing a property in the UK or Northern Ireland. If your property costs more than £125,000 then you will need to pay Stamp Duty Land Tax (SDLT).
Stamp Duty is only eligible to pay on residential property, so therefore if an investor purchases a commercial property such as a care home unit, hotel room or student accommodation pod then they will be exempt from paying any Stamp Duty on the investment property.
What Makes A Good Investment Property?
Care home units, hotel room investment properties and purpose-built student accommodation pods are all investment property which can add great value and diversification to your investment portfolio. However, hotel room investments are a type of property investment that can provide an excellent return without some of the problems that can come with more conventional property purchases.
Investing in a hotel room does not necessarily require much capital outlay and investors entering into a contract with a fixed rate of return do not have any risks relating to the management of the hotel: if the shower breaks or the customer complains about the service, it’s not the investors problem.
Hotels will also generally have a longer history than PBSA or care homes and therefore it is easy to check the track-record of the hotel – how it has been performing over the last 10 or 20 years. This gives investors a great insight into whether the hotel represents a good opportunity for investment.
Furthermore, as a currently operational business there will be plenty of information available in regard to profitability and service – and a quick look at TripAdvisor reviews gives perhaps the most relevant insight into whether the hotel is a good investment option or not.
So unlike care home investments and PBSA there is an impartial third-party resource to help complete research on the hotel.
Hotel rooms provide steady returns. While revenue may vary depending on the property and location, investors can find hotel room investment property that returns up to 10% for an assured period, generally around 5-years. Investors can also put their hotel room investment into a self-invested personal pension (SIPP) to make any income and capital growth completely tax free.
As part of the deal, the hotel room can usually be reserved for personal use for a set number of nights per year. Many hotel management companies will agree a time frame during which the investor can enjoy his/her purchase, usually for several weeks a year.
Hotels are also the only commercial property investment that provide capital allowance up to 40% tax break.
Hotel Investment Properties and Brexit
The ramifications of Brexit are uncertain but is widely anticipated that the weakening of the pound will be good for the UK tourist industry in that it will attract more foreign holidaymakers and increased number of Brits taking a staycation. This should lead to increased demand for hotel accommodation which can only improve returns for the hotel room investor.
Hotel rooms are certainly a profitable commercial option for investors looking to diversify their portfolio into a more secure investment property and without having to put down a large amount of capital.
Best Place To Buy Investment Property UK
When looking at the United Kingdom, there are four countries to consider: England, Wales, Scotland, and Northern Ireland. However, when assessing which out of the three investment property sectors and in which area one should invest, what should be considered are the demographics of the area at various times of the year, future development plans, and potential risks.
Commercial properties provide an investor with the opportunity to diversify their portfolio, and each of the three sectors have similar characteristics that may match an investor’s criteria; they are fully managed, provide passive income, and allow investors to get in at a lower price.
However, there are additional factors to consider when determining which sector to pursue, including assessing your personal goals as an investor and the specific risks inherent in each sector.
To best understand which option is right for you, it is recommended that you reach out to an investment property professional who can walk you through the pros and cons of each investment option.
Investment Property - Investors Summary
Every investment needs to be assessed on its own merits and cross-referenced with your own circumstances to ascertain how suitable it is for you. However all investors focus on low-risk/high-reward investment properties with low-entry price, zero management costs and high NET yields, which is exactly the kind of investments that Sterling Woodrow specialise in. As well as being stamp duty exempt with a built-in exit strategy should you wish to sell.
Sterling Woodrow - Your Property Investment Partner
At Sterling Woodrow, we pride ourselves on helping new property investors get a solid start in the market and are happy to speak to you about your long-term goals and ambitions in property investment, specifically in regard to hotel room investment.
We also work with experienced investors to help them increase the value and profitability of their portfolios.
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