Are Investment Properties Still Worth It? Pros in Cons In a Changing Market

Published On: September 18, 2018Categories: Property10 min read

Gravitation towards investment properties as a nest egg and income producing store of wealth are ingrained in the British psyche. While more than 8 million Brits own stocks and shares to around 5 million with properties other than their primary residence, the relative value of investment properties compared to equities investments mean that in terms of capital allocated, real estate is the UK’s favourite asset class by some distance.

Share ownership was at its most popular during the 1980s as Margaret Thatcher’s privatisation process encouraged Brits to invest in previously government-owned utilities and household names such as British Gas and BT (now O2). Mass marketing campaigns such as that for the British Gas IPO that including the cult line “If you see Sid, remember to tell him”, drove enthusiasm that led to households picking up ownership stakes in some of the 50-something formerly state-run interests sold off over this period.

While many Brits do of course continue to invest in the stock market, especially through pension funds, share ownership is not the mass movement it once was. This is reflected in National Office for Statistics data that shows 5 years ago around 10% of the shares listed on the London Stock Exchange were owned by ordinary British investors compared to 54% in the 1950s.

This doesn’t tell the whole story as investments made through funds don’t show up as private ownership. But whichever way the data is diced, it becomes clear that a combination of factors such as access, affordability, wider education, a lack of access to professional advice at a reasonable cost and risk perception has led to slide in the popularity of shares among the British general public.

Inversely, the trajectory of those with investment properties has moved in the opposite direction – up 30% between 2000 and 2014. Thatcher’s policies again, this time the privatisation of a large chunk of the state-owned social housing stock by offering homes to tenants at very attractive prices, can also be credited as a major catalyst of property investment as a part of British culture. While the Iron Lady is not remembered particularly fondly among the British working classes, it was this policy that made home ownership a reality for many for whom it had previously been out of reach.

And those who did take advantage of the ‘right to buy’ policy of Thatcher’s 1980 Housing Act by taking ownership of the homes they previously rented from their local council profited handsomely. The average price of a UK residential property has increased tenfold in the intervening period, up from just over £20,000 in August 1980 to over £228,000 by the end of August this year.

Many previously working class families and individuals took advantage of the meteoric rise of property prices over the past few decades by taking out equity on homes that had risen steeply in value to buy second and even third, fourth, fifth investment properties, in some cases building buy-to-let empires. In the nineties and naughties, quite a few even, to varying degrees of success, were adventurous enough to invest in property abroad in the hope of catching markets at an earlier stage of the same cycle they had benefitted from in the UK.

The culture of property investment and the British buy-to-let landlord was the result. It’s become central to our culture, an aspiration for many and owning an investment property perceived as perhaps the key milestone on the road to financial security.

Source: Property Moose

The figures also largely back up the enthusiasm, at least over the past decade and a half. Between 2000 and 2014, an insightful report by True Potential shows that £100,000 invested in UK property returned 132% compared to 83% from the stock market, even in the case dividends were reinvested for compound returns. However, over 30 years that picture changes. Between 1984 and 2014 UK investment properties would have returned 402% to 1433% for equities on a compound returns basis.

Nonetheless, property was still a very strong investment and, right or wrong, there is a general perception it is less risky than the stock market. The tangible quality of property strengthens its hand in the eyes of investors. That mindset is so ingrained in our culture it can even be seen in the English language through expressions such as ‘safe as houses’.

Is the Golden Era For UK Investment Properties Over?

But times are changing. Of course, it simply doesn’t make sense for house prices to continue to rise at the pace they have done since the late 1990s forever. The improving standards of living in the UK over the past few decades, the rise of the buy-to-let culture, the development of the mortgage market, credit culture and over the past several years, rock bottom interest rates have all contributed towards the influences driving property prices up.

There have been blips such as that caused by the international financial crisis but overall the only way has been up. A succession of generations have grown up in an environment that has instilled them with the belief that property prices only rise.

However, after another largely interrupted decade of price rises, particularly in the country’s economic HQ of London and the south, since the crisis, many feel we have approached the natural ceiling for property prices. The affordability threshold has been reached and without significant wage growth in future years there is simply nowhere left for valuations to go. Does Brexit uncertainty, slowly rising interest rates, stagnating real wages and peak affordability mean significant capital gains on investment properties are no longer a plausible possibility over the foreseeable future?

If rental returns were strong that wouldn’t be a such a problem but with the huge growth in property prices when compared to wage growth, rents have struggled to keep up, especially where prices are highest. Investment properties in London generate rental returns that struggle to top 3.5% in today’s market and are often less. But they are at least secure which goes a long way in the eyes of investors.

Or at least, they were. A growing sentiment that the size of the buy-to-let market has been contributing to pushing house prices beyond the reach of ‘generation rent’ led to a political backlash against the sector. Until recently, owners of buy-to-let investment properties were able to deduct mortgage interest from their taxable income.

That privilege was withdrawn from April 2017, with mortgage interest tax relief being reduced in stages until April 2020, when it will be replaced entirely by a 20% credit. Investors will ultimately see an 80% reduction in what they could once deduct. The previous system of an automatic 10% deduction on taxable net income for wear and tear on furnished properties has also been scrapped. Now wear and tear can only be claimed by landlords who hold their investment properties in a company structure and tax relief has to be applied for on individual repairs or the replacement of appliances.

The recent tax changes have proven a further blow to the attractiveness of UK property as an investment. Recent empirical reports from real estate agents and mortgage industry figures suggest the combination of a slowing market and tax breaks being tightened indicate a trend of landlords selling up and fewer new entrants to the buy-to-let market.

However, the picture is not black and white. The UK’s property market has become fragmented and while price growth has stagnated in much of London and the South East, the same has not been the case for more northerly cities, such as Birmingham, Liverpool, Manchester, Leeds, Edinburgh and Glasgow. Starting from a lower base, prices have continued to grow strongly over the past couple of years and rental returns are also much higher, at up to 9%.
So is UK property still a worthwhile investment? Perhaps investors simply have to choose their location carefully.

Or have prices already reached, or will soon reach, their zenith, robbing the asset class of the potential for meaningful future capital gains, which, in conjunction with a less generous tax environment means investment properties simply don’t make sense anymore?

The question is so confusing at the moment that the highlight of the recent FT Weekend Festival was a panel of experts given the main stage to discuss it. A summary of the arguments for and against is as follows:

The Case Against UK Investment Properties as an Asset Class

Property transactions in ‘prime’ central London are down as much as 20%, indicating a stagnant market that could be in place for a number of years.

The change to tax relief rules means making a profit in buy-to-let is tougher than ever before.

Brexit turbulence might mean lenders shut up shop and buy-to-let mortgages become tough to acquire and tied to stringent stress tests.

Bank of England Governor Mark Carney recently forecast a discordant ‘Hard Brexit’ exit from the EU for Britain could hit property prices by up to 35% over the next several years.

The Case For UK Investment Properties as an Asset Class

Growth is still strong and shows no sign of letting up in cities such as Manchester and Liverpool. Many experts believe that these locations still offer a compelling investment case. In yet others, it is just now that the ripple effect from the years of stratospheric price gains in London and the South East seems to be reaching them. Their upwards cycle could just be beginning, as yet unburdened by the affordability ceiling looming over them. The likes of Glasgow and Newcastle are still at or below 2008 levels when cities such as Bristol, Cambridge and Oxford are 50% higher.

Rental yields in more northerly big regional cities and major towns are also still attractive and achieving 7% is not unusual. It is even possible to get as high as 10% under the right circumstances.

Even in mature markets such as London, the current drop off in the number of buyers represents an opportunity. Despite the potential for future price rises perhaps limited, London’s property market is still attractive from the point of view of safety. When things are going badly, it suffers less and also recovers much more quickly. It is considered by many investors as the fixed income equivalent of the property market. Returns may not be sexy but they are secure. And as sellers come to terms with the new reality that there are fewer buyers out there, the chances are buyers will increasingly be able to secure bargains at toughly negotiated prices.

Ed Mead, founder of property services company Viewber goes as far as to say that now could be the best moment in recent times to buy investment properties in London:

“I think it’s the best time there’s ever been to buy in London,” he said. “Most people sell because they want to buy something bigger. Say you’ve got a £1m house that’s now worth £850,000. You’re trying to buy your dream house, which might have cost you £3m three years ago, and you can probably buy it now for £2.25m. Who’s winning there?”
Richard Donnell, director of Hometrack, the housing market analysts, also doesn’t believe that the recent changes to tax relief mean that UK property is no longer a good investment and can offer a ‘pension-style income stream:

“Yields are low, but if you invest in the right markets this long-term link between rental and earnings growth is to me the underlying attraction of investing,” he said. “Learning to love the cash flow and taking what the housing market gives you on house price inflation is the way to approach investment.”

Finally, Brexit could also prove to be a positive for property investors, especially those able to take the long view. A tough Brexit pushing down prices will mean great opportunities for those who can afford to buy and should provide space for good price growth when the economy moves into recovery mode, on the presumption that it will, sooner or later. On the other hand, a reasonable Brexit agreement or strong performance from the UK economy once uncertainty has been removed could lead to a quick 5%-10% rebound from a market supressed by the unknown quantity that has been the reality over the past couple of years.


With all of the variables, there is of course no certainty as to whether investment properties acquired now will prove to be a strong long term investment. However, within a longer term context, there are enough positives to make a good case that property is not an investment class whose time is over. There are opportunities and some regions are still performing strongly right now. 6% of properties bought in Burnley are sold within a year, indicating the market still supports the approach of ‘flipping’ investment properties for a quick profit – a sure sign of a healthy market. That’s three times the 2% average across the UK. This is helped by the fact towns like Burnley still have properties that fall under the £125,000 value threshold for stamp duty.

The conclusion has to be that investors have to be more discerning about the location of where they buy investment properties but that returns are still there.

About the Author: Jonathan Adams

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