With buy-to-let an increasingly unattractive option, residential funds may appeal to more investors.
The government launched its build-to-rent scheme in 2012, under which it provided loans to development companies in an attempt to encourage the growth of the private-rented sector (PRS). The scheme has now been replaced by the Home Building Fund, a £3bn fund intended to boost the number of houses built in England. This investment in the sector comes at a time when landlords face rising costs and regulation. As a result, many now see the idea of investing in residential property via a company or a fund as increasingly attractive.
There are plenty of advantages to investing in residential property in this way. As well as offering greater liquidity (ease of buying and selling), using a listed property company means you avoid the hassle of managing property and tenants. You don't have to take out a mortgage, leaving yourself vulnerable to the risk of becoming financially overstretched or damaging your credit rating. A fund is more diversified than a typical landlord's portfolio, investing in houses of various types in a variety of locations. And unlike directly held property investments, you can hold these shares in an individual savings account or private pension.
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On the downside, you lack the control you enjoy with direct ownership. And it is worth bearing in mind that investing through a property fund comes with an extra layer of intermediaries and management fees.
So what are the options? Grainger (LSE: GRI) is one well-known property developer. It has spent the past couple of years investing heavily in the private-rented sector it has invested over £650m since January 2016. In the year to 30 September the company's net rental income had risen by 8%, with 3.3% average rental growth from private rentals, outperforming the 1.6% market average.
Another option is to buy a real-estate investment trust (Reit). The PRS Reit (LSE: PRSR) launched in May 2017 and is now worth about £500m. The trust invests in newly built properties for private rental, in the "key" cities and towns of England (outside London), and plans to build a £1bn-plus portfolio of mainly family houses. As of the end of March, PRS had completed and rented out 276 properties, which should generate an annualised rental income of £2.4m or so.
Alternatively, there is the much smaller, early-stage KCR Reit (Aim: KCR). The trust owns a property in Chelsea, made up of ten studio flats subject to assured shorthold tenancies, as well as the Osprey portfolio of seven freehold properties with individual units let on long leases. At the end of December 2017 the portfolio was valued at £9.45m, an increase of £2.2m compared with 30 June 2017. Finally, on the unlisted side, the TM Hearthstone UK Residential Property Fund is another fund that invests in private rental housing in terms of returns, it aims to match the growth in UK house prices, as well as producing income.
There is obviously no guarantee that your investment in a residential-property fund will be a lucrative one. Right now, house prices in the UK in general, and London in particular, are wobbling, to say the least. But if you are looking to invest in residential property without buying directly (and this is certainly a more effective way to get diversified exposure), stick to firms such as these, rather than invest in aggressively marketed, unregulated property-investment scenes.
Emma Lunn is a multi-award-winning journalist who specialises in personal finance and consumer issues. With more than 18 years’ experience in personal finance, Emma has covered topics including mortgages, first-time buyers, leasehold, banking, debt, budgeting, broadband, energy, pensions and investments. Emma’s one of the most prolific freelance personal finance journalists with a back catalogue of work in newspapers such as The Guardian, The Independent, The Daily Telegraph, the Mail on Sunday and the Mirror. As a freelancer she has also completed various in-house contracts at The Guardian, The Independent, Mortgage Solutions, Orange and Moneywise.
She also writes regularly for specialist magazines and websites such as Property Hub, Mortgage Strategy and YourMoney.com. She’s particularly proud of her work writing about the leasehold sector and a Guardian front-page story about a dodgy landlord. She has a real passion for helping people learn about money – especially when many people are struggling to get by in today’s challenging economic climate – and prides herself on simplifying complex subjects.
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