Although buy-to-let (BTL) residential investments might be waning from the radar of many investors, investment property for sale in the UK is not just about this segment. Options for alternative property investment in the UK include Purpose-Built Student Accommodation (PBSA), Care Home investments and Hotel room investments.
Buy-To-Let Market Post-Brexit
BTL is a bit of a double-edged sword at the moment. On the one hand, you have low property prices, low-interest rates, increasing rental demand and, because of declining supply, expected increases in rental prices. It might sound like the ideal time to invest in a buy-to-let property.
But on the other side you have unfavourable tax changes, increased regulatory burdens on landlords, reduced investment returns and expected interest rate increases on the horizon that will eat into rental returns.
As a result, buy-to-let landlords continue to exit the market – which is what the government was hoping for with the letting reforms.
The idea was to make buy-to-let investments less attractive and increase the housing stock for first-time homeowners. The additional stamp duty of 3% on buy-to-let purchases plus the phasing out of the income tax relief on rental income (to be replaced by a 20% tax credit on mortgage interest paid in 2020), seems to have done the trick. This will push some investors into the higher income tax brackets and eat further into rental yields.
Although Brexit uncertainties have caused house prices to stall and make it cheaper to get in the market, it also reduces the potential capital return of investors should they decide to sell their property.
Investment Property For Sale UK: Purpose-Built Student Accommodation (PBSA)
The value of the UK PBSA sector is estimated to top £50 billion in 2019 and we mentioned in a previous post how PBSA have been the top returning asset class for 5 years, with typical yields of around 8% still achievable.
Demand for PBSA is strong with 23,000 purpose-built bedrooms to be completed for the 2018/2019 academic year and 11,000 more planned for the 2019 and 2020 academic years.
However, it is a maturing market with the increased supply in certain student cities making over-saturation in the near future a real risk. Over-saturation combined with increased competition from available accommodation providers means there is an increased risk that your PBSA property could sit unoccupied for prolonged periods of time.
There are various other challenges facing the PBSA property investment UK market.
Brexit is again casting doubt over the industry for those thinking to buy student accommodation. Overseas students make up around 14% of university acceptance rates, with a large portion of these students (some 86,000 in 2017/2018) part of the overall demand for PBSA’s. The exact terms of the UK’s decision to leave the EU still have to be ironed out which can cause a drop in the number of overseas students and lead to further over-saturation.
Changes in local UK demographics also mean the number of people turning 18 fell in 2018 and will fall again during 2019, leading to reduced demand in the short term, although this is set to pick up in 2020.
Other challenges of the PBSA investment market include lower rental yields, mostly off-plan builds (which is riskier) and typically no guaranteed buy-back option.
Care Home Rooms as Property Investments
The percentage of the UK population that is over 65 is steadily increasing, from 15.8% in 1995 to an expected 23.6% by 2035. By 2025, 2.8 million over 65’s will need nursing and social care.
The ageing UK population means that the number of elderly people needing purpose-built accommodation, such as care homes, will continue to increase.
Care home investments in the UK return yields of up to 10% and typical investments of between £70,000 and £80,000 means the threshold for entry is quite low. It can, therefore, be a worthwhile, hands-free investment option.
However, the sector faces a number of challenges. If the freedom of movement is impacted after Brexit, it could leave the adult care sector with staff shortages of around 115,000. 17% of England’s’ 1.3 million care workers (or 220,000) are foreign nationals.
Some care homes are also heavily reliant on subsidised funding from local authorities. If this funding is reduced, it could have an impact on your rental yield and even cause care home operators to shut down.
Most care homes will also be off-plan, meaning you buy the unit before construction is completed. Although this allows for significantly lower purchase prices, the time between buying and seeing returns on investment can take up to two years. It is therefore very important to research the location and developer’s track record thoroughly.
Finally, care homes are a niche market. Not everyone can or will want to live in a care home unit which could impact tenancy rates and the consistency of your rental income.
Investment Property UK: Hotel Room Investments
Hotel room investments are set to become the top performing asset class in the coming years. Growing demand fuelled by the relatively weak pound that continues to attract international tourists, and the increase in the number of Britons that take staycations, mean hotel rooms in the UK have good average occupancy rates of 77.6%.
RevPAR (Revenue Per Available Room) and ADR (Average Daily Rate) is expected to grow during 2019 and despite the Brexit uncertainty, the UK already beat their 2020 tourism target of 40 million annual inbound visits, with 40.9 inbound visits in 2018.
Other than the continued demand for investing in buy to let hotel rooms, there are several additional benefits for hotel room investors:
- Hotel room investments offer high net yields of 10% and typically come with an assured exit strategy through a 120% buy-back option after year 5.
- Investors do not have to worry about repairs, maintenance or advertising (hands-off investment) as hotel rooms are fully managed going concern businesses with positive reviews and growth plans.
- The commercial status of hotel rooms means they are exempt from paying Stamp Duty.
- Hotel rooms do not require a long-term commitment from occupiers. Therefore they are more likely to pay room prices which further support consistent occupancy rates.
- As they are running businesses which are maintained on a daily basis, hotel investments allow for a fast rerun on investment. As soon as the purchase price is paid, investors can start enjoying rental yields.
Investors should always do their own research on the hotel management company to make sure they have a proven track record within the industry.
It is also worthwhile to look at the average occupancy rate of the hotel and the region as a whole before deciding to invest.