We are already well into 2021 and as the world continues its fight against the ongoing pandemic, investors across the world continue to seek out opportunities that will offer them both scope for short and long-term success.

One asset class that continues to prove immensely popular is the UK residential property market. A very well documented shortage of quality housing coupled with a significant rise in the first-time buyer age indicates there will be an increasingly strong rental demand for the coming years. Furthermore, various reports suggest an overall increase on capital of c.20% across the UK for the next five years which will follow a bumpy 2021 as the markets react to the virus vaccination process. This is exciting news and we anticipate witnessing a huge increase in investor demand. This is extremely encouraging but many investors in the interim have been sourcing alternative opportunities with a view to increasing their shorter-term income. Ensuring their hard-earned capital is not eroding due to inflation is the key motivating factor so let us look at some of the options that some investors are opting for to try and improve this.


UK Property Market – why so popular?

Firstly, let us touch on the primary reasons why the UK property market has proved and continues to prove popular to investors worldwide. There is a combination of factors with some established above, i.e., lack of housing, increase in First Time Buyer age demographic but there are others that drive the fact that prices have increased by close to 80% in the past twenty years.

A robust legal process that protects all parties is a critical factor and the well-established secondary market acts as the key conduit to success. Most importantly, there is a clear and concise exit strategy for investors should they need it, providing them with an opportunity to fully release any gained equity and the original capital invested. 

It is fair to say that some other opportunities below offer higher levels of income, but do they offer the exit routes for investors should there be an emergency need for capital or indeed for when the investor simply wishes to switch strategy and release their funds?

We have summarised some of the options below for you and please feel free to reach out and discuss any of these with us.

 
Student Pods have been all the rage for some time now and why not with developers offering hi-tech developments with accommodation that something students of yesteryear would have dreamed off. On-site gymnasiums, cinema rooms, games rooms etc are standard and coupled with developer rent guarantees of 7-10%, have resulted in many investors flocking to take advantage.

Sounds too good to be true but we must return to one of our golden rules above to assess the overall appeal of such an investment, namely the aforementioned exit route strategy. In short, there is pretty much no secondary market for student accommodation and as such, if you need to release your original capital, you will struggle. Therefore, this becomes a simple income vs capital growth play and full research should be undertaken prior to commitment.

The Pro’s:
 
  • Guaranteed income for often up to five years
  • Increased build quality and offering to tenants
  • Potential for income beyond guarantee period

 

The Con’s:
 
  • No secondary market
  • Cash purchases only – Mortgage lenders will not fund student accommodation purchases
  • No clear exit strategy

 

Verdict:

Clear and simple, invest with an open mind.

The guaranteed income for five years is attractive but needs to be weighed against the potential of your capital not being able to be released. If there is a way of assessing the income potential after the guarantee period, then the investment can be accurately assessed but it is often impossible to do so.
 
 
An abundance of various types of these opportunities have flooded the market in recent times and promise the investor rates of returns that can range from 8-14%. The original capital outlay can be held by the proposer for anything from 12-60 months and will be typically used to fund land purchases and the development costs of a site. The proposing company will offer this option to clients as a way of raising a percentage of funds for their development which will operate at a cheaper form of borrowing for them to that of some standard business and mezzanine funding rates.

The Pro’s:
 
  • High rates of returns
  • Short to medium-term capital outlay

 

The Con’s:
 
  • Investments are not regulated
  • Returns are not guaranteed
  • Capital returns are subject to solidity of the loan note proposer

 

One such extremely popular type of this investment was the Dolphin Investment fund which promised investors returns of 10-12% for their capital outlay. The funds procured was used to develop tax efficient listed properties in Germany and then sell the individual units to investors. Unfortunately, the developer was unable to keep up with the development costs and subsequently went into liquidation and with it went the investors funds. The legal wrangles are ongoing as the BBC reports here.

Verdict:

The rates of return are excellent, but investors must be aware that their funds are not protected. If the company offering the investment fails, your funds will be lost. If you do invest, do so with an open mind and keep your investments to a small and manageable amount.
 
 
This type of investment has actually proved more popular than student accommodation in recent times and in essence, offers a very similar model for investors to follow. A cash lump sum is required as no mortgage lending is available and clients are offered a very positive rate of return, often guaranteed for longer than the five years offered by student pods.

There is also an indication of a secondary market with providers offering a buy back option after 10, 15 or 25 years. However, this is not yet proven to be robust as the investment opportunity is relatively new and as such, the exit strategy is yet to be tested.

The premise is that the investor will purchase a room within said care home and will be rewarded an income with all management and tenant sourcing provided.

Investors are attracted to the guaranteed income which is payable from completion of the purchase.

The Pro’s:
 
  • Guaranteed income
  • Potential for secondary market albeit unproven at this stage.

 

The Con’s:
 
  • Secondary market yet to be proven. Investors are urged to check the small print of the ‘buyback’ offer as this can vary significantly from provider to provider. Some have the option to renege should their ‘financial stability’ not be secure enough to offer said facility
  • Buyback option is subject to the future financial stability of the provider.
  • Cash purchases only – Mortgage lenders will not fund student accommodation purchases
  • No established clear exit strategy

 

Verdict:

Once again, the advice is clear and simple, invest with an open mind.

Any investment should form just a small part of your overall investment strategy with an acceptance that that the initial capital outlay may not be returned. If the income on offer over the long-term is appealing, then this can prove a successful element of an income generating portfolio.
 
 
As mentioned at the top of this piece, investors are all scrambling to source opportunities that sees our hard-earned savings work harder for us. The overriding theme from assessing the options above is that there are investments on offer that can see us derive good income potential over the shorter term.

However, this income is provided with a clear asterisk attached in that there are simply no guarantees available, the investments are not protected, and your capital remains at risk throughout.

The key to success is to accept this, keep your investment levels low in accordance with your attitude to risk and compliment your portfolio with investments that do offer a robust and proven exit strategy. It becomes a clear income versus growth debate and if investors can be appeased by the income against any capital growth (and indeed, any original capital outlay released at any time) then there is a case for investing.

Here at Thrive, our focus remains on the ‘bricks and mortar’ approach that has proved successful for decades. i.e. starting and building UK property portfolios.  The initial income returns may not be as exciting but over the long-term, the growth and income combined with a solid exit strategy represent the most secure method of investing within the UK market.