With the prime minister issuing the call to ‘build, build, build’ many could be considering investing in property. Reece Mennie puts forward the case for an alternative route down the bricks and mortar avenue.
2020 was certainly an interesting year for the property investment and development market.
While developers faced the initial hardship of having to pause construction under original lockdown restrictions, thousands of landlords have felt the brunt of widespread redundancies with tenants unable to make rental payments.
Like the majority of market sectors, the Covid-19 pandemic has resulted in a wealth of challenges for the property industry.
However, there have also been a number of significant changes that have and will continue to increase property development, fuelled by advances in legislation and a shift in the use and demand for commercial property.
As a result, high network and sophisticated investors have started to alter how they invest in property, trading the hassle of tenant management for funding large scale commercial to residential developments with the potential for far greater returns.
Therefore, although we cannot predict exactly what will happen over the next 12 or 24 months, it’s clear that the alternative property investment market will continue to rise during 2021. Here’s why:
The fall of buy-to-let
History has taught us that periods of economic decline result in opportunity for property investors and developers, as a synonymous decrease in property value offers attractive investment opportunities for both individuals and organisations looking to expand their portfolio, whether through buy-to-lets or the re-development of large, unoccupied premises.
However, following the introduction of chancellor Rishi Sunak’s Stamp Duty holiday, the UK property market hasn’t experienced the decline initially forecast at the outbreak of Covid-19, with residential property prices actually rising by 0.9% in September 2020 and annual growth up by 5% – the strongest level of growth recorded since September 2016.
Therefore, with high demand and limited stock available at attractive prices the buy-to-let market has continued to dwindle, with this current challenge deemed yet another blow to landlords who, in recent years, have struggled to make any real return on investment as a result of evolving ‘Landlord Taxes’.
Consequently, more investors have turned to property bonds as an alternative means to secure attractive returns on their hard-earned capital, enabling savvy individuals to invest in the development of a property, without the hassle of owning it.
Essentially, it is a loan to a property development company to partially fund a construction project.
As a ‘lender’ not a landlord, investors trade the hassle of managing tenants and day-to-day financial issues such as maintenance fees, insurance and tax for a, generally higher, fixed rate of return over a fixed period of time, confirmed through a legally binding agreement.
What’s more, with long lead times, ‘alternative’ property developments currently under construction aren’t likely to feel the current financial impact of Covid-19, where even those near completion can be strategically priced or refinanced for sale.
As a result, investors can be safe in the knowledge that any current dip in the market won’t impact their agreed fixed rate of return for however many years down the line.
The Infrastructure Revolution
Despite the current pandemic, the UK Government has maintained a clear focus on property development with Boris Johnson announcing an ‘infrastructure revolution’ strategy that will “identify where we can get spades in the ground, build our communities, and create jobs faster for citizens across the United Kingdom” and ultimately encourage developers to ‘build, build, build’.
This combined with the introduction of new Permitted Development Rights [PDR] in September 2020, which allows developers to convert both commercial and retail buildings into housing without making a full planning application, is likely to drive an increase in large scale property developments and resulting alternative property investment opportunities throughout 2021.
This follows a growing appetite for commercial to residential conversions, which increased by 40% throughout 2016 and 2017 and would have continued to accelerate during the last three years.
What’s more, as independent retailers struggle to survive the pandemic and increasing numbers of corporates opt for permanent remote working to reduce overheads, more and more commercial units will become available for developers to convert into residential property, continuing to drive the market forwards.
Therefore, despite mounting uncertainty and growing concerns for the UK economy, the alternative property investment market looks to be on steadier ground for 2021 and is predicted to continue to growth as ex-landlords and high net worth and sophisticated investors fund future developments for a want of greater returns, simply not available via buy-to-let or volatile investment vehicles.