Investing in UK buy-to-let is increasingly difficult. The Land Registry states that the average house price as of June 2023 is £287,546, which means significant capital is required to create a diversified portfolio. Financing such investment using mortgages is now expensive following 14 consecutive rate increases by the Bank of England. On top of this, many of the tax advantages have ended and new regulations are driving up opex and capex costs, further squeezing returns. The consequence is that investing directly in buy-to-let is increasingly the preserve of institutions and the wealthy.
Nevertheless, we believe that UK buy-to-let properties still have a place in any well balanced portfolio as the asset class will continue to perform well, not least because demand will likely outstrip supply for many years to come. The key drivers for new homes will be continuing immigration, which will fuel population growth, and the shrinking average household size. By contrast, NIMBYism and the stranglehold that large housebuilders have on land available for development will limit the supply of new homes. The result will be rising rents and house prices.
How can you invest in property without buy-to-let?
How then should investors square this circle? REITs solve many of the challenges. They provide exposure to a large portfolio of properties across different segments of the real estate market. As they are listed on the stock market they provide liquidity. They are managed investments and tax efficient.
Yet, in spite of these benefits, the share price of REITs are usually correlated to the wider stock market, thereby undermining one of the key reasons for investing in UK residential property – diversification. Furthermore, they are also something of a “black box” which doesn’t make them appealing for an investor that really wants to understand the nuts and bolts of their investments and how a portfolio has been constructed.
If REITs don’t provide all the answers, what then should investors do? The answer is; take a look at Housemartin. All investors, large or small are welcome. There are over 60 properties to invest in. Each property is presented as a stand alone proposition with full transparency, so informed decisions can be made. Liquidity is provided through an exchange for each property, so investors can buy and sell commission free. The properties are tenanted by well established organisations on long term leases. Furthermore, rents are usually above market rates and often linked to inflation.
How does Housemartin do this?
There are essentially two separate problems to solve. The first is to break down the barriers to investing in property. The second is to address the issues relating to the underlying properties themselves.
Breaking down the barriers to investing in property
Housemartin uses crowdfunding to finance property purchases. By pooling funds together, investors overcome the large capital requirements that they would be required to have if they were to buy a property outright. To this end, the platform operates under the consumer credit framework, making it a regulated P2P lender overseen by the Financial Conduct Authority (FCA).
- The process involves creating a limited company for each property, where its only purpose is to own that specific property. Investors then lend to this company so that it can purchase the property. The proceeds of the loan are then used to purchase the property. The net rent generated from the property is returned to investors as interest.
- The loans are broken down into small units, typically around £1. This allows users to invest as little or as much as they desire and makes the platform open to everyone.
- Interest is paid out to investors in proportion to the amount invested on the day the rent is received.
- The properties listed on the platform each have a dedicated Exchange, where investors can buy or sell investments without incurring any commission or fees.
- Each of the companies has highly restrictive Articles of Association, which ensures that the investors control the property. Investors are required to vote on decisions related to the property, which further provides a sense of involvement and ownership.
- Full transparency is a key aspect of Housemartin. All relevant information, including copies of the lease, RICS Surveys, management accounts and news about the property are published on the property details page of the website. This comprehensive data allows individuals to make well-informed decisions about their investments and fosters a sense of connection and engagement with the properties on the platform.
- As this is a P2P mechanism, the contracts are classified as “Article 36H loans”. This makes them qualify for an IFISA. As a result, investors wanting to invest via an ISA tax wrapper can do so.
- A comprehensive reports section ensures that investors can keep track of their investments. The reports can be customised to any time frame or property. They also include tax statements for investments made outside an IF ISA.
Making property more investable
Crowdfunding only solves half the problem. Housemartin exists to make it easy to invest in properties that deliver great returns. In order to identify these exceptional properties, we first needed to understand why investors are attracted to buy-to-let and why, in its current guise, it is failing to meet expectations.
The principal attraction of buy-to-let for investors is the long term, hassle-free, and stable annuity-style income it provides. In several respects, traditional buy-to-let is not well placed to deliver this as most properties are tenanted with Assured Shorthold Tenancies (ASTs) and the nature of these contracts are often at odds with the goals of investors. Firstly, they usually last for 6-12 months, whereas investors usually have much longer time horizons. Whilst ASTs are frequently rolled, their short term nature means they have to be managed. This erodes earnings as property management fees are between 8% and 12% of rental income and tenant finder fees are often a further 10%. Landlords are also responsible for general maintenance costs, which LandlordsToday put at 28% of annual rental income.
When we first launched Housemartin in January 2019, our aim was to make traditional Buy-to-Let accessible. We quickly realised that, for the reasons outlined above, we couldn’t make the yields appealing enough to attract investors and the time required to manage the properties meant the business model wasn’t scalable. It is no coincidence that the three properties on Housemartin that are tenanted through ASTs have the lowest yields and take up a disproportionate amount of management time.
The solution, we discovered, was to source regular residential properties but use them to provide supported living. Properties used for this purpose are the same as any other residential property, but they are tenanted using a commercial lease. This has several benefits:
- There are no property management fees
- Tenants look after the day-to-day repairs and maintenance
- The leases are typically between 5 and 10 years
- Tenants are often prepared to pay higher than market rents
- Rents are usually linked to inflation
- The properties are often homes for life, so the leases are renewed and deliver income over decades
- High quality and reliable tenants (Registered Providers and Housing Associations)
As a result, properties tenanted this way not only have higher rents, but also lower costs. The result is better and more stable yields for investors than regular buy-to-let properties can deliver.
In addition to these investment benefits, the properties are being used to provide a home for vulnerable people. We find that for an increasing number of our investors this is an important reason for investing on the platform.
It is also worth noting, that for the most part, credible providers of supported living try and avoid renting properties from individual landlords. They prefer the organisational structure and scale that institutions provide. Mortgage companies also prohibit individual landlords from tenanting their properties under commercial leases. Housing Associations and Registered Providers (the tenants) don’t like ASTs, due to their short time horizon, as they cannot provide the necessary security that vulnerable people require.
In conclusion, Housemartin is a gateway for retail investors who want to invest in UK residential property without the vagaries of a fund, but at the same time do not have the resources or time to own properties outright. Our crowdfunding approach means that investors can carefully put together a portfolio that suits their needs, made up of properties that deliver many advantages over traditional buy-to-let. To this end, we believe it is no exaggeration to say that we are democratising buy-to-let.