The residential property sector is set to welcome a new wave of professional investment. Joanna Faith looks at whether the asset class is a good play for retail investors...
We save for them, read about them, speculate about their value, and spend hours searching for the perfect one.
Yet despite being a nation obsessed with home-owning, the investment fund potential of residential property has, up until now, been largely overlooked.
While commercial property has for decades been a staple part of many investors’ portfolios, residential property has yet to achieve any real eminence among retail investors and their advisers.
Now, a renewed push from both the government and residential property industry is hoping to reverse this trend and encourage a new wave of professional investment into the asset class.
We tackle the concerns
Notably, the industry was given a significant boost in the March Budget when George Osborne announced the disaggregation of stamp duty on bulk house purchasing.
The tax had long been cited as an obstacle standing between investors and investment into the asset class.
The Investment Property Databank (IPD) has also been vocal in its support, recently concluding residential market let investment has consistently rewarded investors with greater returns than commercial property and other asset classes since 2000 despite lower income yields.
Another significant development is the launch of a series of funds from specialist manager, Hearthstone Investments, which, according to the group, will allow investment into professionally managed residential property by retail investors for the first time.
Its inaugural proposition, the Hearthstone UK Residential Property fund, which aims to closely track the housing market, is set to launch in October and, according to CEO Christopher Down, will hopefully encourage further new entrants into the market.
It will invest into a nationwide portfolio of rental properties which approximately match the existing distribution of UK housing stock and will be available through ISAs, SIPPs and wraps.
Added to all this, residential property has long been deemed a good hedge against inflation, a fact that cannot go unmentioned as the UK rate continues to hover well above target at 4%.
However, despite considerable tailwinds, concerns still resonate among investors and advisers who believe the risks of investing in residential property outweigh the reward.
We consider three main factors deterring investment in the asset class and find out whether or not they are valid.
Diversification: funds can only invest in rental properties
While big-name commercial property funds can invest in a range of sectors including industrial, retail and office, their lesser-known residential cousins can only invest in rental properties.
Robert Walters, investment director, property at Broadstone, the wealth managers, said this means you end up with significant concentration of risk into particular areas.
“Funds in the past have invested in small homes in the North East or apartment buildings in Leeds. You’re entirely dependent on the manager of that asset buying well and then securing long-term tenancy.
“There are not many residential funds, especially available to private investors, which can give the diversity you would get in the commercial sphere,” he said.
Rather than generic residential portfolios, Walters favours development funds whereby managers buy poor quality property in good locations, develop it and sell it on.
For example, the prime central London market, which according to Knight Frank data, has seen gains of 30% since March 2009.
Richard Hatter of Epsilon Real Estate Partners, a private property development and advisory company, said investors are more comfortable with developments in Central London, where the market is strong and performing well.
“London was resilient in the downturn. Property markets were badly affected but the recovery has been strong particularly in London, mainly thanks to international money.”
Sixty one nationalities bought property in the capital last year, according to Hatter.
Down believes investors are wrong to equate commercial with residential property. He maintains residential should be treated as a separate asset class or, at the very least, a separate sub-division of property.
He said: “They respond differently to economic drivers and have different characteristics in downturns. Residential dipped by about 15% in the credit crunch, for example, while commercial property funds were down about 40%.”
To counteract worries about concentration risk, the Hearthstone fund will invest throughout the UK mainland, with around 21% to London, 25% to the South East and smaller percentages in other regions.
“Property is not like equities,” he said. “It is a real asset and you are in it for the long term. Today’s hot residential area moves around. If you are constantly chasing hot spots you have to consider the frictional costs of going in and coming out.”
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