Invest in property or in the markets? Life is a series of choices. This also applies to how you invest now for a bright financial future in your later years. Setting aside cash in the bank is sensible, but because of inflation, it’s not a great plan for a 30-year event such as investing between the ages 30 to 60 or 60 to 90. Two common alternatives in the UK are:
- Invest in a blended global portfolio of companies and bonds with a leading fund manager, or
- Buy property – a residential buy-to-let, a holiday home, a commercial property like an office block or workshops, or even a retail unit.
According to the Investment Association, their 200 members collectively manage £7.7 trillion on behalf of clients in the UK and around the world.
According to a recent survey from Savills, UK residential property is also worth just over £7.2 trillion.
This is a lot of money.
The British have a fascination for property and homeownership, with the idea that ‘your home is your castle’ still pervading UK society. Popular television programmes about ranking neighbourhood homes, moving home (here or abroad), building a home from scratch or renovating a home are everywhere.
The same fascination, at least on television, does not extend to investing.
Which option is best for investment returns?
It all depends, and it’s not an either/or decision. Much will depend on which time period you are looking back to.
You can’t replicate those historic returns into the future. The data tells us that for some periods, property (the Halifax Property Index) beat the MSCI World Index, and vice versa. Two examples illustrate the differences:
- During the tech crash of 2000-2003, the MSCI fell whilst the property sector continued to make progress up until 2007.
- During the global credit crunch of 2007-2009, the MSCI and the property sector both went into decline.
A comfort factor for investors is that you can see and touch a property. It’s a tangible thing. An investment portfolio, by comparison, is almost invisible apart from charts and figures on a computer screen.
The key factor behind your reason to invest must be to beat inflation and retain the purchasing power of your money. It is fair to say that over long periods, UK property and a global investment portfolio have beaten inflation.
Which option is most costly to manage?
However you invest your money, always consider costs very carefully. Ignore charges at your peril.
Neither option is cost-free. You pay your money and you take your choice.
The table below highlights several costs to be factored into your likely return.
|Property (such as a buy-to-let)||Investment portfolio|
|Survey fees||Adviser fees|
|Letting agent costs||Fund manager costs|
|Maintenance and decoration||Platform or wrap charges|
|Legal fees||Exit charges|
|EPC ratings||Initial costs of buying|
|Carbon monoxide kits and smoke detectors||Fund research fees|
|Gas surveys and safety certificates||Transaction costs|
|Grounds maintenance||Custody fees|
|Stamp Duty||Stamp Duty Reserve Tax (on UK shares)|
|Service charges||Portfolio turnover rate|
|Mortgage costs/servicing debt||Bid-Offer spreads|
|Landlord insurance||Accounting costs|
|Legal costs for bad tenants||Valuation costs|
|Capital Gains Tax on eventual sale||Trustee/Depositary expenses|
|Possible accountancy costs||Audit fees|
|Immigration checks||Regulatory costs|
Neither table is an exhaustive list. In your circumstances, there may be more or fewer costs involved. Just make sure you don’t believe the headline costs. Check the small print.
Which option will take up most of my time and be more complex?
That’s a tough question. For many investors, one single property value could equate to an entire investment portfolio value which might incorporate 8,000 individual holdings.
One property, one portfolio. It looks the same on the surface. Some property investors feel that they don’t need any advice, and most will buy very near to home, as opposed to up-and-coming hot spots. Being a homeowner already, it seems easy to simply add to it.
An investment portfolio, by comparison, is highly regulated and most investors will want to take professional advice. Once fully invested, the normal arrangement is to have an annual progress meeting for an hour or two. You may be asked to add money to your pension and/or ISAs.
A property will have a tenant, commercial or residential. Tenants come with challenges and can be needy. There are rent and contract reviews, annual landlord safety certificates, decorating upgrades, letting agents to deal with, insurance renewals etc.
Are you in work or retired? Do you have the time and patience to be a landlord? Is the property easy to get to? Are you a good negotiator (agents and tenants) and good at handling conflict (late payments, voids, damage)?
How safe are my investment options?
For property, insurance is key. Fire, flood and damage, even tenancy voids and legal responsibilities.
There is no protection against a fall in property values. Nor are there government regulatory bodies to support you.
For an investment portfolio where you were advised, there is the company PI insurance, the regulator (FCA), the Financial Services Compensation Scheme (FSCS), and the Financial Ombudsman Service (FOS); quite a body of protection to keep you safe. Market values go down sometimes of course, that’s natural but your adviser should only invest for you in a risk-adjusted manner that you are comfortable with.
Of the two alternatives, which is most risky?
It depends on what you define as risk. The risk of being illiquid without access to your money? The risk of a total loss? The risk of an economic downturn? The risk of a lost or falling income? Of fraud? Or the risk of not achieving your original goals?
Hopefully, before deciding how to invest, you considered what you wanted to achieve and by when. These are your goals and ambitions. It could be: “Build a future value of £2 million by age 57 in order to extract a 4% income, generating £80,000 a year so that I can retire in comfort.”
Most portfolio investors don’t borrow money to invest. Most property investors do borrow to invest, usually with a mortgage or bank finance. This is called ‘gearing’ and can work for and against you. Interest rate rises can be harmful, and you may struggle to increase the rent. Falling property values may endanger your loan-to-value status and your tenant can’t help you out.
According to the Halifax Price Index, UK property values fell by 26% from August 2007 to October 2012 and didn’t recover until January 2016. That’s a downturn of over eight years.
For property, losing a good tenant can be an issue, especially if you have borrowed to invest, or need the regular income. If you own just one investment property, your asset is highly concentrated. If the area is overdeveloped or falls in status, the effects can be damaging. The reverse is also true. An investment portfolio should be well diversified and so avoid any concentration risk (but check to make sure).
An investment portfolio often produces returns that look volatile on a chart. Ups and downs, zigs and zags. When viewed over long timeframes, the chart lines typically go from bottom left to top right. It is the investor that creates a real loss, simply by extracting their money at the worst, darkest moment, often due to irrational fear. If you sit tight and hold on, markets usually recover the paper losses and then add further growth.
What part does taxation play?
It plays a big part. This blog doesn’t have the space to go into every aspect.
Capital gains tax will be due on any gains above the annual exempt amount. The rates are 18% or 28%.
Income tax (at 20%, 40% and 45%) may be due on rent received with interest payments on mortgages now only relievable against basic rate tax.
You cannot hold residential property in an ISA or pension (at least not without incurring significant penalties) meaning little chance of eliminating capital gains and income taxes.
Capital gains tax will be due on any gains above the annual exempt amount. The rates are 10% or 20%.
Income tax will be due on any interest received from investments, but most investment is in company shares which pay dividends. Dividends are taxed at lower rates than interest or rental income (7.5%, 32.5% and 38.1%) and have a £2,000 annual allowance which would go unused if you only bought property.
Most shares and funds can be held inside an ISA, pension or investment bond providing a wide range of tax benefits. Between the wrappers mentioned there can be savings on capital gains, income and inheritance tax.
How quickly can I get hold of my money?
Life rarely goes strictly to plan. Having chosen your investment with a view to the long game, a sudden cash emergency arises, and you need all or some of your money.
Property by its very nature is inflexible. It is difficult to sell a modest portion of a 1-bed BTL (basically you can’t). Selling up isn’t easy. There may be exit charges on borrowing. The market may be flat. The tenant has a legal right to remain. Even a remortgage will take some time to complete.
Extracting cash from an investment portfolio is typically much simpler and the money should be with you within 15 days from request, all being well. There are exceptions of course. You may be unlucky and have large exit costs or be invested in HEDGE FUNDS OR ILLIQUID STRUCTURED PRODUCTS (always check the holdings before you invest). If the markets are tanking, some funds may ‘close’ to withdrawals.
Overall, extracting cash from a portfolio is simple and easy.
If I need a regular income, what should I choose?
For an investment portfolio, there should be dividends from company shares, interest from cash and coupons from bonds (gilts). In addition, it is possible to withdraw capital tax-efficiently by using your annual capital gains tax (CGT) allowance (£12,000 2019/2020). There is a dividend tax allowance of £2,000. You can’t offset any allowable expenses for an investment portfolio. At the time of writing the yield on the FTSE All Share is 4.22%.
With property investing there are some expenses you can offset. The government is cutting back on the attractiveness of the buy to let (BTL) market, especially if you are a 40% or 45% taxpayer with a BTL mortgage.
Income yields from good tenants can be reliable, although there can be quite a difference between the gross and the net income after costs. This website from Totally Money shows the yield hot-spots. For example, according to property.data.co.uk the yield on a 1-bed property in Norwich is 5.4%.
This decision can be summarised by saying it is going to take significantly more time, money, effort and energy to use property as your investment vehicle. However, property portfolios, lock-up garages, commercial premises, holiday homes and buy-to-lets still account for a significant element of personal wealth.
Many investors don’t want to relinquish control to City ‘suits’ and want to DIY their way to retirement riches.
You need to ask yourself, is buying property going to be something I enjoy? Despite the time, effort and energy, you may derive a lot of enjoyment from the administration and the management that goes with having property as an investment.
Going to auctions, renovating properties – if you can think of nothing better perhaps property is for you.
If this is your “thing” and you have the expertise, then you are more likely to excel where many others have failed. Having an avid and invested interest in property is a prerequisite.
Enjoyment aside, despite many of the factors described in the table many people still say property is more familiar. You have probably bought your own home to live in so, despite there being many complexities such as dealing with solicitors, understanding leases, land registry, stamp duty, building surveys, house insurance etc., you feel as though you have had a trial run and increased your knowledge.
Bear in mind that an investment portfolio will also probably include exposure to property via housebuilders such as Persimmon and Taylor Wimpey. Taylor Wimpey, along with Tesco, actually appear in a list of the top 50 landowners, comprising 1 million acres in the UK (source: land reg and https://www.telegraph.co.uk/property/uk/companies-land-england-wales/).
There is also commercial property which you can access via an investment fund. This includes things such as: retail space, including shopping malls and offices; industrial buildings, e.g. warehouses and factories; as well as hotels, resorts, leisure, healthcare and storage facilities to a lesser extent. Companies like British Land and Land Securities are the best-known UK companies in this area.
Are you unsure which way to turn? Give one of our team a call for impartial and balanced advice or a second opinion. We would love to hear from you. Contact us today.