Property Bonds verses buy to let
If you’ve been looking for a market with the potential to deliver above average returns on your investment, you’ve no doubt considered the property sector. Choose the right investment vehicle in the property market and you can generate a substantial income but untangling the media coverage, facts, and predictions of what will happen next to get a true picture of returns and stability can be a challenge. Here, we’ve cut through the clutter to provide a clear side-by-side comparison of property bonds and buy to let options to help you identify the best investment opportunity for your money, appetite for risk and current portfolio.
There’s no denying that a decade ago the financial crisis hit the property market hard. According to Savills, the Global Financial Crisis (GFC) fundamentally changed the UK housing market, with the repercussions of subprime lending leading to austerity measures, huge losses in market value (a 20% fall in 16 months), a massive fall in transactions and less lending overall. The deepest economic recession in the post-war period weighed heavily on the property market.
Today, it’s a different story. Even with the average property value falling between 2007 and 2010, house prices doubled in the first decade of the 21st century, with the average price of the UK home increasing from £81,596 to £167,020. It’s a trend that’s continued over the last seven years too. The latest figures from the Halifax House Price Index show that house prices have risen by 4.5% in the last 12 months. The average house price is now a record £225,826. In London, the recovery has been even greater – the average property value in 2007 was £292,409. In 2017, it’s £478,142 according to Nationwide.
So, the property market has been a great investment prospect but, assuming direct property investment and buy to let is the best option may not be right.
Average UK House Price 2017 £225,826
Average House Price in London 2007 £292,409
Average House Price in London 2017 £478,142
The reality of investing in buy to let properties after the crash
You will need to have a sizeable cash deposit to purchase a property outright or take on a buy to let mortgage.
As a result of the financial crash, interest only lending has fallen to just 1.72% of the market, and percentage of lending at over 90% LTV has slumped from 14.1% in 2007 to just 3.9% in 2017 (source: PRA/FCA).
Realistically, you’ll need just as big a deposit – if not more – as a standard buyer to gain a foothold in the buy to let market. It’s not only the huge cash investment that makes this an unattractive option either – increased tax, squeezed margins, regulatory changes and the fact buy to let properties in most regions struggle to deliver a yield above 3% all need to be weighed up.
There are other downsides to consider with the buy to let option too. In its report “The Global Financial Crisis – 10 Years On” the estate agent Savills warns…
In the year to March 2016, buy-to-let lending was effectively back to where it was in 2007. Now it is at half those levels. This effect is likely to become even more entrenched as the progressive reduction in tax relief combines with rising interest rates to squeeze affordability.
As a buy to let investor, you’ll also need to comply with stringent regulations, pay associated expenses such as stamp duty and refurbishment costs, and keep up to date with ongoing landlord responsibilities. The reality of choosing to invest in a buy to let property means being prepared to take a risk, invest a substantial amount and commit to long-term obligations.
Investing money in property bonds can offer better returns and more flexibility compared to typical “Buy to Let”.
Property bonds are another option for those that are keen to take advantage of the robust property market when buy to let investments just aren’t the right fit. If you can’t raise a huge deposit, want yields above 3% and don’t want the hassle of regulatory compliance and maintenance, property bonds offer many of the benefit without the burdens.
Bonds are a thriving asset class at the moment, reflecting the accessibility and flexibility that they offer. In fact, fixed income assets were the best selling asset class during the third quarter of 2017, with sales amounting to £4.9 billion.
Like the buy to let market, the returns delivered with property bonds vary. However, as a fixed-income asset class, you know what your expected yield is before you part with your money. This certainty makes property bonds an attractive option for those with a low appetite for risk as they’ll give you peace of mind when you’re choosing an investment vehicle. It also makes it much easier to manage your money and your portfolio than would be the case with buy to let, where income will depend on town, the market value of the property and tenants.