Is it a good time to invest in property?

Property has always been an attractive sector for investors, but with market turmoil and a potential house price crash, we look whether now is a good time to invest in property.

House chart graphic
(Image credit: © Getty Images)

Regular house-price growth, high rents and low borrowing costs may have once tempted investors into backing the property sector, but the market’s foundations are being shaken by higher interest rates and a bleak economic outlook, leaving investors asking if now is a good time to invest in property.

Rising interest rates and higher mortgage pricing already appear to be feeding into the housing market with both Nationwide and Halifax reporting slowing annual price growth and monthly declines in their recent indices.

Halifax is also forecasting an 8% drop in house prices next year.

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This may be exacerbated by the prospect of a UK recession, hitting people’s jobs and incomes and further affecting what tenants may be able to afford when it comes to rent, or what buyers will be able to borrow and spend when purchasing a property.

Higher borrowing rates and falling housing demand may hit investors in bricks-and-mortar-focused funds and shares as well as buy-to-let landlords.

We explore if now is a good time to invest in property and how you should do it.

Are property funds the right move?

There is a sense of deja-vu among investors as the £453m Columbia Threadneedle UK Property fund suspended dealings in October due to high levels of redemption requests. The suspension was reviewed in November and currently remains in place.

Just two years ago, many property funds – including Columbia Threadneedle’s - were temporarily suspended during the pandemic as they couldn’t keep up with demand from worried investors.

The liquidity mismatch is a long-running risk of investing in open-ended property funds and the industry is still awaiting reforms from the Financial Conduct Authority to introduce a minimum 180-day redemption period.

Investors have already been steering clear of this asset class, with net outflows from retail property funds for much of this year including £351m during the third quarter of 2022, Investment Association data shows.

A recessionary environment paired with high inflation is pretty toxic for commercial property funds, according to Jason Hollands, managing director of DIY investing platform Bestinvest.

“It will impact capital values and rental income as vacancies rise and it will also become more difficult to raise rents when potential tenants can shop around,” he said.

“If you’re going to invest in commercial property – I personally wouldn’t right now – look for portfolios with very high tenant quality where the length of averaged unexpired leases are quite long with low exposure to shops or retail.”

Darius McDermott, managing director of Chelsea Financial Services, highlights that other property funds have more cash on their books than the Columbia Threadneedle product, so, while there is a risk of contagion, there is no guarantee.

Aside from the liquidity issues, he highlights that investors may consider the returns on property funds to be too poor for the risk being taken.

As of October 2022, the IA UK Direct Property sector was down 0.8% over one year and up 3.4% over five, Morningstar data shows.

Should I invest in real estate investment trusts (Reits)

Property funds rarely appear on fund platform recommendations or research lists nowadays other than real estate investment trusts (Reits) and investment trusts.

The more liquid alternative of Reits and investment companies – where you just have to sell your shares to access funds – are currently trading at large discounts to net asset value (NAV) of up to 50%, underlining the economic uncertainty.

For example, the logistics-focused Tritax Big Box Reit currently has a discount to NAV of 37.4%.

This may present a buying opportunity, but Russ Mould, investment research director at AJ Bell, warns careful research is needed.

Reits specialise in various sectors so there will be varying demand dynamics and degrees of sensitivity to the economy as well as different levels of debt.

“If there is any sense that the Bank of England is going to pause and pivot on interest rate policy and start cutting again, then these are the sort of stocks which would, in theory, do well, especially after the recent hammering they have taken,” he said.

Are property stocks worth buying right now?

Property stocks provide another investing option, although there have been large price declines in recent years.

The share prices of Barratt and Persimmon are down 48% and 58% so far this year, while estate agency brand Foxtons is down 27% and property listings portal Rightmove has declined 33%.

This didn’t stop investors from buying property stocks at a discount in September when Taylor Wimpey and Persimmon appeared on the top ten stocks purchased on the interactive investor trading platform, although they have since fallen off the list.

Housebuilding stocks were already under pressure from development delays and material shortages and now, alongside estate agents, are facing a possible dip in demand as mortgage finance costs rise.

But Mould says the question is whether property stocks have fallen so far that they look like contrarian value.

“The house builders nearly all trade at a discount to historic net asset – or book – value per share and they have net cash balance sheets, so are much better placed to withstand any downturn than they were in 2007,” he added.

Should you back buy-to-let?

Away from investing, buy-to-let has reaped high returns for property investors.

The average rental yield in the UK is currently 3.63%, according to property adviser Track Capital, but there are some areas such as Nottingham, Bradford and Manchester where landlords can still get double-digit returns.

Investors benefit from the security of regular rental income as well as house-price growth.

The sector was already becoming more challenging for landlords and property investors though, with an extra 3% stamp duty charge on additional home purchases and the restriction of mortgage interest relief to the basic 20% tax rate.

Rising buy-to-let mortgage costs present a new challenge.

Landlords could get an average two-year fixed rate buy-to-let mortgage for a record low of 2.51% back in May 2020 and 2.94% for five years, according to Moneyfacts.

The equivalent rates are now at 6.43% and 6.36% respectively as of December 2022.

The stress tests and rental cover requirements for a buy-to-let mortgage have also increased, creating a difficult situation for landlords looking to preserve their returns.

Craig Fish, founder of mortgage broker Lodestone, said the typical rental coverage and stress rate on a buy-to-let loan before the mini-Budget was 145% of the mortgage payment at 4.5%.

But the stress rate has, in some cases, now increased to 8.49%, Fish said.

A landlord purchasing a £300,000 property with a 25% deposit would have typically needed to charge an average monthly rent of £1,250 to £1,300 but the new stress test pushes the rental cover figure to £2,308.

“Modestly encumbered landlords may not need to do anything with rents but those who are quite heavily geared are going to be in for a shock,” he added.

“They are going to have to sharply increase rents or exit the market.

“Those that will suffer the worst will, as ever, be the tenants.”

Karen Noye, mortgage expert at wealth manager Quilter, said she has seen more buy-to-let purchases through a limited company, where full mortgage interest relief remains.

She suggests landlords should seek longer fixed rates and adds that higher house prices and interest rates would increase rental demand.

“A looming price correction does make this asset less attractive – although if you look historically, as long as you invest in property for the long term you will benefit,” added Noye.

“The decision should be led by someone’s financial plan and unique circumstances rather than a knee-jerk response to the fiscal climate.”

It seems the door to property investing remains open as long as you tread carefully.

Marc Shoffman
Contributing editor

Marc Shoffman is an award-winning freelance journalist specialising in business, personal finance and property. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and The i newspaper. He also co-presents the In For A Penny financial planning podcast.