Learn about the UK's highest yielding property investment in this informative guide
It is rated as “highly transparent” (JLL) – meaning that it provides one of the most favourable operating environments in the world for investors and developers.
Residential housing represents the largest non-financial asset in the country, with a NET worth of £5.1 trillion and 1.75 million active landlords (HMRC).
Strong capital growth potential has been key to its appeal, with average house prices tripling over the last 20 years – from just over £70,000 in 1999 to £223,000 in 2017.
Apart from a dip in 2009, house prices increased every year during this period – though there has been somewhat of a slowdown in recent years.
Commercial property is valued at £883 billion, and is recognised as the top global destination for the sector’s private investors (Knight Frank).
It represents a higher-yielding alternative to residential housing, with a shallower entry point that allows for portfolio diversification.
UK real estate is hugely popular with foreign investors, who account for 28% of residential property investments. They also make up 16% of commercial property investment activity, with a third of this taking place outside London.
The combination of a high birth-rate, immigration and an aging population saw society grow by 538,000 in 2016 – the biggest rise for 70 years (ONS).
Housebuilding companies have long failed to keep pace with this spiralling demand and are building approximately 140,000 new homes a year – far short of the 250,000 annual target set by the Labour government back in 2007.
The Royal Institution of Chartered Surveyors predicts that, unless deep-seated issues are addressed, the UK will have a shortage of 1.8 million homes by 2025.
In April 2017, they also noted that the number of properties sitting on estate agents’ books fell to just 43 per branch in March – the lowest figure since the body started collecting the data in 1978.
This shortage has caused an enormous surge in house prices, with the average time required to save for a deposit now an eye-watering 22 years.
Since vast numbers of people cannot get onto the housing ladder, 19% of the population now live in the private rental sector – nearly double 2002’s figure (English Housing Survey).
Property values have grown exponentially since the Second World War but recent performance suggests that this has come to an end.
At £219,266, the average house price in the UK is only 10% higher than the August 2007 peak.
With yields sitting at only 2% NET, this means that the average BTL property investor would have earned approximately £65,800 over the last decade, or 30% of the purchase price.
Even a property investor that bought in April 2009 when prices were at their lowest would only have made 42% capital growth since then.
Our commercial property investments, however, are unaffected by the wide range of factors that influence UK house price. These include economic growth, unemployment, interest rates, consumer confidence, mortgage availability, supply levels investment in infrastructure.
Unlike the residential market, commercial property values directly relate to income generation and our buyers receive 8-12% NET annual yields – effectively doubling their money in a decade. Our 10-year fixed income agreements also mean that clients benefit from up to 40% capital growth through yield compression.
According to international real estate advisor Savills, overseas investors poured £5.8 billion into our regional commercial property market in 2016, accounting for almost one third (29%) of the total investment outside London.
In 2014 and 2015, when investment volumes in the UK regions were at an all time record, overseas investors represented an 18% (£4.1bn) and 27% (£6.1bn) market share of the total.
Savills reports Middle and Far Eastern buyers were busy outside London in 2016, spending £1.9 billion, an increase of 90% on their total spend in the UK regions the previous year.
They also note major interest from European investors who had a 32% market share of total investment in the UK regions, with German investors accounting for almost half.
As always in property investment, location is paramount. Careful research needs to be carried out to identify those places where a housing undersupply will translate into the sustained high demand required for reliable yield delivery.
Assurances over build quality also shield buyer yields from the excessive maintenance costs that arise from poor workmanship. Quality properties in the UK will be accredited by the NHBC, with new builds protected by 10-year Buildmark warranties.
A regular and consistent income is the ultimate hallmark of a good property investment. Ideally, this would come in the form of a long fixed income agreement that provides buyers with a pre-determined NET annual income, with no costs or surprises.
Resale is central to maximising income from a property investment, and buyers should be able to sell whenever they want. They should also look out for transferable fixed income periods that can be used to stimulate strong capital growth.
Other risks include market volatility; if you need to liquidate during a downturn, you may have to sell at a loss. If you do well and make a profit, you may well be liable to significant Capital Gains Tax.
Rental income can be affected by a range of external influences, such as the national economy, local development or local business closures. There is no such thing as a guaranteed yield for a residential property landlord.
Void periods are inevitable and need to be budgeted for. If the worst comes to the worst, eviction proceedings are inevitably lengthy, costly and will lead to loss of rental income and possibly damage to the property.
Before you make any kind of investment, always make sure you can get out easily. Anybody’s circumstances can change overnight, but unlike stocks and shares, residential property resale takes a lot longer than that. You could be left high and dry.
And remember, most investments offer you some form of customer rights and protection; residential property investment does not.
Emerging Property provide fully managed UK property investments, with £155m worth of stock sold to date and 2,500 units currently under our management.
Emerging Property provides fully managed UK property investments, with £155m worth of stock sold to date.
This video provides an overview of our property investment approach that is generating 8-12% NET annual income to thousands of clients from around the world.
It also provides an introduction to purpose built student accommodation, the UK’s highest yielding property investment over the last six years (Knight Frank)
The proportion of residential stock being bought by property investors looking to tap into the private rental market has grown sharply since the 1990s, and they now account for 20% of all mortgages across the country.
While landlords can hire a management company to administer the property on their behalf, it is equally common for them to take a hands on approach to avoid income being eroded.
Today, buyers receive an average annual yield of 2%, making it a higher yielding option than savings accounts and ISAs. This is a low for the sector, and a result of government initiatives to curb this runaway sector in the face of the country’s housing shortage.
Since the introduction of a Stamp Duty surcharge in 2016, buy-to-let property buying has decreased by 30%. However, in the long term, it is expected that higher costs – with a range of sector regulation being introduced over the next few years – will be passed on to tenants.
Property investors now rely on capital growth at resale to maximise income from this asset. With property prices oscillating randomly and the sales process taking over three months, income here is unpredictable.
This performance is underpinned by a strong demand from the UK’s ever-growing student population. It has doubled in size during the last 20 years, with 30% of this growth coming after four consecutive record-breaking years of student intake.
While these private halls of residence have long been the preferred accommodation choice for students, there are only enough bed spaces for 26% of the country’s students – forcing 1.7 million students into substandard alternatives in the private rental sector.
In comparison with residential housing, beneficial economies of scale decrease costs for each individual unit buyer. This also allows for added benefits like a permeant onsite management presence, excellent facilities and advanced security systems.
Property investors receive an average of 6.5% NET income each year, with strong yield-driven capital growth and excellent resale options thanks to the sector’s buoyant secondary market.
Despite this increase in supply, however, the industry still experienced 81% occupancy levels in 2016 – a record for the sector and higher than hotel occupancy which sat at 77.2% during the same period (ASAP).
Future expansion will be led by the regions, with growth of 20.5% forecast in 2017, compared to an increase of 8.1% in London (Savills).
Strong demand is built on the UK’s thriving visitor economy. It is the 6th most visited country in the world (UNWTO) and attracted 37.3 international tourists in 2016 – a 3% annual increase and the highest level since records began in 1961.
By providing a bridge between Airbnb and the traditional hotel sector, serviced apartments are ideally positioned to capitalise on technological shifts and changing consumer preferences.
This explains the popularity of serviced apartments and underlines why they are growing into a mainstream property investment class. Sitting between 6.5% and 9.5%, sector yields are also outpacing the traditional hotel sector.
This popularity comes as a result of sophisticated and transparent legislation, as well as favourable exchange rates.
Traditionally, the UK’s commercial property market has been dominated by the office, retail and industrial sectors.
Alternative property investments, like serviced apartments and purpose built student accommodation, have increased their market share rapidly over the last few years.
Despite the Brexit referendum, the total volume invested into UK commercial property hit £27.2bn in the first six months of 2017 – a slight increase on the same period in 2016 (Savills).
Savills forecasts that average market yields are expected to be around 5.5% for UK commercial property in 2017 and will improve over the next five years. Total income varies from sector to sector, with current levels displayed in the chart opposite.
Learn about the UK's highest yielding property investment in this informative guide
Discover how the 10-year fixed income contracts provide buyers with attractive resale options