The last few years have seen an eruption of geopolitical volatility. A pandemic, several global lockdowns, and the re-emergence of war in Europe have placed significant strain on the international economy – and its assets – dampening the investment landscape across the board.
Nowhere is this more true than in the UK, where a revolving door of prime ministers and policies, Brexit, and a self-induced economic crash are all adding to investment instability.
Although the resilience of various assets is being tested, one has consistently been able to weather the storm in times of crisis: real estate. The most overwhelming piece of evidence of this effect are, indeed, house prices. Their consistent growth over the past several decades has been remarkable – despite the aforementioned headwinds, the average home price in the UK is almost six times higher today than it was in 1992.
While other assets have demonstrated high levels of growth over the last 30 years, real estate remains unique by virtue of the interest and importance it commands in UK society. Here, homeownership is still the perennial aspiration of our lifetimes. This is echoed in both the British media and parliament where the debate over rising home prices is both intense and fraught.
This near-genetic desire for homeownership has sufficiently supported the UK property market against the most difficult of backdrops. While this persistent growth may paint a picture of a strong but unchanging market, things are far from stagnant across the real estate sector, with major innovations in market participation and changes in the way assets are acquired.
Winds of change across the investment landscape
For years, the dominant strategy of asset acquisition in the real estate sector was to gradually build a buy to let (BTL) portfolio. It was also a strategy easy to employ; landlords would renovate, maintain, and rent out properties, receiving a regular rental income while the value of the home only increased over time.
Compared to other investments, BTL historically afforded significant tax benefits, enabling investors to offset their mortgage interest payments as well as maintenance costs.
However, changing regulations and taxation have lessened the appeal. Over the best part of a decade, various measures have been introduced to give tenants greater home security and increase much-needed housing stock levels.
These have included a 3% stamp duty surcharge for additional homes in 2016; the temporary lowering of mortgage interest tax relief in 2017; changing HMO regulation and the easiness of landlords to evict tenants. Finally, an upcoming bill is set to remove ‘no fault’ section 21 evictions.
Positively, much of this regulation has been legislated to provide greater fairness for tenants and to boost home supply, yet this has in turn altered its perception among investors with the verdict becoming increasingly clear – the BTL market is in decline. Earlier this year, Shojin commissioned independent research among 690 retail investors which confirmed as much, with 61% of investors saying they have lost confidence in the BTL market.
Nonetheless, the appeal of real estate remains high with 59% of retail investors considering real estate to be a strong asset class and 51% saying the current imbalance between supply and demand is a strong factor behind its appeal. Comparatively, 40% of investors said real estate would be more attractive were it not for the complications involved in property ownership; among this aged 19-34, this rose to 67%.
These sentiments leave little surprise as to why investors are now turning towards the Build-To-Rent (BTR) market. BTR properties are those that are purposefully developed with renting in mind, such as blocks of rental flats and large-scale housing developments.
Typically, BTR properties tend to be part of large-scale developments which are designed to offer unique benefits for tenants. The size of such developments set enhanced expectations on sustainability, connectivity, and community. Consequently, BTR developments often afford communal facilities and green spaces, designed to facilitate community interaction and a higher quality of life.
In addition, such developments are usually placed in urban hot spots, relieving pressure on the most strained areas of the UK housing shortage and offering more profitable and secure returns for investors.
Indeed, growth in the sector is expected to explode over the next decade according to a study by the British Property Federation and Savills. Their research shows the number of BTR properties is expected to reach 380,000 by 2032, an increase of a factor of five, with an estimated value of £170 billion.
Empowering access to the BTR market
It’s important to note how changing demand patterns have reshaped the real estate investment landscape. Formerly, access to institutional-grade real estate investment opportunities was restricted to only the wealthiest investors; today, fractional investment platforms have opened up opportunities to the masses. Born from innovations in the prop-tech space, fractional investment platforms allow individuals to buy ‘shares’ or ‘stakes’ in large-scale developments, massively lowering the price of entry, meaning that thousands of wealth opportunities are created from one.
Most excitingly for investors, the inseparable nature of these developments from an asset perspective means that the ‘share’ grows alongside the entire body, which, in the case of property as we have demonstrated, is remarkably consistent.
While more traditional BTL investment strategies will still appeal to some, the BTR sector is emerging with increasing investor focus and stands to have a transformative impact across the real estate market.
There’s no doubt that investors are witnessing an unprecedented democratisation of investment. With fractional investment platforms, like Shojin, leading this change and gaining wider market prevalence, we must continue to address the sector’s blind spots and harness the power of digital innovation to challenge the dynamics of traditional equity ownership.