Opinion – why alternative property investment is overtaking buy-to-let

5 March 2021 | Investment

Opinion - why alternative property investment is overtaking buy-to-let

There is no question that Covid-19 has completely torn through the UK economy, with any signs of recent recovery likely to be dashed as the country endures its second national lockdown.

However, one sector that has continued to fare well despite initial and new restrictions is the residential property market, with data from HM Revenue and Customs confirming an estimated 129,400 house sales in December 2020 – which was nearly a third (31.5%) higher than December 2019 and 13.1% higher than in November 2020.

However, with payroll numbers showing the number of workers on payroll having fallen by over 828,000 since the pandemic began, according to figures from the Office of National Statistics (ONS), the same positive stats cannot be reported for the rental or buy-to-let sector. 

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A recent study by Citizen’s Advice revealed that almost a third of renters across the UK had lost income during the pandemic and 11% were in rent arrears. Furthermore, the number of private renters behind on their rent has also doubled over the last 12 months.

In addition to the challenge of rent arrears, landlords haven’t been able to generate viable yields on buy-to-let for a long time, with evolving landlord taxes resulting in an average annual return of 3.53% for the UK market; a figure even considered to be ‘over-performing’.

When compared to the projected returns and no hassle promise of property bonds, it is clear to see why hundreds of thousands of landlords are now selling up and reinvesting funds into the alternative market, with Covid-19 as the final catalyst for making this change.

Asset-backed investment, no hassle

Alternative property investment or ‘property bonds’ enable savvy individuals to invest in the development of a property, without the hassle of owning it. Essentially, it is a loan to a property development company to partially fund a construction project.

As a ‘lender’, investors trade the hassle of managing tenants and day-to-day financial issues such as maintenance fees, insurance and tax for a fixed rate of return over a fixed period of time, confirmed through a legally binding agreement.

What’s more, with long lead times, ‘alternative’ property developments currently under construction aren’t likely to feel the current financial impact of Covid-19; where even those near completion can be strategically priced or refinanced for sale. As a result, investors can be safe in the knowledge that any current dip in the market won’t impact their agreed fixed rate of return, with the average between 8-10%, a somewhat significant increase when compared to buy-to-let.

Savvy investors diversify

The pandemic has completely obliterated many investment channels in addition to buy-to-let, with the stock market taking a serious hit. However, the savvy investor has been circumventing volatile markets for years, particularly following the Brexit decision several years ago together with political uncertainties overseas.

Although Covid-19 has taken investment challenges to a new level, it is these periods of uncertainty that forces investors to think differently and to diversify their portfolio and investment decisions in order to make viable returns.

The alternative property investment market is one such route, and with construction not impacted by secondary lockdown restrictions, both developments and resulting returns are more likely to remain on track.

As it stands, there is no definitive end to the current Covid-19 pandemic, however the initial pangs of panic have disappeared and there is definitely a stronger resolve amongst business leaders, developers and investors to fight back, disrupt and diversify; where one great place to start is with the alternative property market.

*Sezer Sherif is the founder and CEO of investment group, Vector Capital

This post has originally been featured in Property Investor Today.