Investment into alternative property sectors is not a new trend. For a few years keen property investors, and even landlords, have looked beyond traditional property investment, whether that be commercial or buy to let, for better returns and long-term stability.
Some commercial investors have been moving away from traditional retail and office space over the last few years, with the decline of physical shop-front retail and the lessening demand for office space. These commercial sectors have seen an even more rapid decline due the COVID-19 pandemic, and where there is still demand, businesses have their standards extremely high in terms of what they are looking for within an office space/building.
Investment into alternative sectors, however, has been quite dynamic. Across Europe it has been growing by an average of 17% P.A. since 2015. Among the most popular alternative types of property investment is student housing (PBSA), senior housing, healthcare, hotels, leisure and mixed-use. As well as the smaller non-tangible (meaning not physical brick and mortar) investments: property bonds or loan notes, RIETS, Peer to Peer Lending (P2P) and crowdfunding.
Many of these have been around a long time, they are established and its arguably borderline whether some of these sectors should not be considered as asset classes of their own, instead of ‘alternatives’.
What has happened to traditional buy to let during the pandemic and how are investors feeling?
It’s worth looking at why alternative investments in the property market are getting so much attention now.
In previous eras of economic decline, history has shown us a precedent of opportunity for property developers, investors, and landlords, whereby property prices decline, and the market becomes quite distressed. These individuals in the past have expanded their portfolios for less money and reaped the rewards in the recovery period.
However, throughout the Covid-19 pandemic we have not seen this housing market precedent. Even though stagnant from March to May 2020, the consensus for many in the UK, following the first lockdown, was to move to a new house. This combined with the Chancellor’s Stamp Duty Holiday incentive in July 2020, the housing market did the opposite to what most experts predicted, with residential property prices rising by 0.9% in September 2020 and annual growth up by 5% – this was the strongest level of growth recorded since September 2016.
Will 2021 continue to see growth in the alternative property investment sectors?
With the extension of the Stamp Duty Holiday and as we emerge from what we hope to be the third and final lockdown, demand from home movers remains higher than ever which in turn limits the stock available, as a result there are no attractive property prices or deals for the watchful buy-to-let market.
This just feels like another set-back to landlords, who in recent years have already had to overcome a few knocks, with evolving and unfavourable landlord taxes. For many, their rental returns do not look anywhere near as attractive. On top of these key factors, for landlords that want to buy property with the aid of a mortgage, this has also become a lot harder during the pandemic. Uncertainty in 2020 meant that many UK lenders had to withdraw their mortgage products from the shelves and imposed thorough loan application review processes. Consequently, many saw extended mortgage deployment times, and even increased rates of application rejections.
Alternative property investment in 2021. A year of new opportunities?
Having analysed some of the tough challenges landlords and investors have faced through the pandemic, what are they considering now? What sweet-spot property asset classes or ‘alternatives’ are investors and landlords bolstering their diverse property portfolios with?
Purpose-built Student Accommodation (PBSA)
Purpose-built Student Accommodation is one of the UK’s fastest growing alternative investment sectors and according to CBRE is set to be at the forefront of the property market by 2040. The UK is the second largest destination (after the US) for international students, who are increasingly important to education and student accommodation in UK cities. Applications were up 7.7% year-on-year in 2018 (EU +3.4%, Non-EU +11%). This increase continues to boost investment into PBSA, with numbers trebling between 2007 – 2017.
The Coronavirus has financially impacted universities and the PBSA sector in 2020 and 2021, however international and national student numbers are expected to surge for the 2021/22 intake, with the hope of travel restrictions lifted and on-campus programmes and teaching in the classroom becoming the norm again.
Mixed-use developments and institutionally owned private rented housing
The benchmark and offering of many mixed-use developments continues to increase, with high specification apartments, duplexes and townhouses, complemented by landscape gardens, common areas and in some cases facilities, such as gyms, attract and retain tenants with high-quality living.
By 2040 there could be more than half a million rental homes under institutional ownership across the UK.
In turn these projects attract all types of investors. Institutional investors are attracted by the demand backdrop and risk-return profile. These developments are set up, financed and sold in a number of different ways, all offer interesting high returning options to investors. Retail investors can buy single or multiple properties directly from the developer to be managed on their behalf. Some offer investment through a real estate investment trust (REIT), while some offer Loan Note or Bonds as a route to invest in the property market.
For an example of a Loan Note product click here.
Click here to learn How Loan Note investment works.
Two other alternative sectors that are commonly linked to property development, for a hands-off investor or landlord looking to diversify are:
Peer to Peer Lending (P2P) – a simple way to invest in property with a low entry starting point. Investors lend money to borrowers with cash secured against residential or commercial properties. There are several UK secured lending platforms, starting from £500.
Crowdfunding – it differs from peer to peer in that you can get a stake in the property and a return on the capital growth and rental return income. Innovative Isa’s or IF Isa’s are offered by P2P and Crowdfunding platforms and investors can benefit from tax-free interest and tax-free capital gains on their annual Isa £20k allowance.
SOURCES: Savills UK | CBRE