Alternative Property Investment set to become more popular

by Charleston Financial

The UK, with its painful shortage of housing stock, means this sector has always been seen as valuable. The UK Government's target of building at least 200,000 new homes each year has been hampered by a number of factors, including planning regulations and opposition from local populations.

This does seem to be changing and the two big barriers to development appear to be coming down. For a start, the Government is relaxing planning regulations and the signs are that attitudes are beginning to shift too. Indeed, one recent Centre for Policy Studies report indicated that 56% of people support new homes being built in their localities, which is more than double the figure of 28% back in 2010.

However, one new hurdle has emerged: investing in opportunities that arise in the conventional Buy-to-Let sector is now more complex. The Government have not only increased stamp duty for additional homes by 3%, but they have made other taxation adjustments that have made it more expensive for individuals.

This means it is increasingly more difficult for individuals on their own to invest in a second or third home - which in turn means that the sort of structured products to be found in the Alternative Property Investment market are more attractive.

They are being seen as a better way to invest in the property market without all the new expense with which it is now associated.

Semi commercial mortgages offer higher yields and full mortgage relief

Many investors are having a good look at some of the semi-commercial and commercial property arrangements - like flats above shops - as potential alternatives to conventional Buy-to-Let.

A good reason for this is that these kinds of property are exempt from the tax changes, which came into force in April and have hit the conventional Buy-to-Let market.

Put simply, since the stamp duty surcharge was introduced, buyers of mixed-use properties have been paying significantly less in tax than those opting for traditional residential Buy-to-Lets. This is because semi-commercial and commercial properties attract commercial property stamp duty, not the surcharged residential property tax.

Those who invest in mixed use properties are also hit less hard by the mortgage tax relief changes that came into effect in April, because any commercial part of the property is exempt from these changes.

And for those unwilling to jump into the complexities of pure commercial property then semi-commercial properties represent a happy middle ground. They also mean investors are taking a small and measured step, rather than a massive portfolio leap, as well as diversifying any risk owning both commercial and residential properties.

Other attractions for investors looking at this sector is that most offices still fall under permitted development rights, which means certain changes of use and other building works can be carried out without any planning application.

A lot of investors are keen to find ways to increase the value of properties they own, while keeping their tenants happy so they reduce any danger of void periods, which can be very costly for landlords.

A popular way of improving a property’s value is by buying cheaply and refurbishing to improve its worth. It's an increasingly popular strategy among entrepreneurial investors, because it allows them to transform properties that might have been somewhat worn and torn by age or neglect, into ones fit to bringing in higher rental yields. Refurbishment to sell is also a very popular option for quick returns.

What to consider when looking at structured deals

For most the property market is a long term investment; but there are some products available that enable investors to stag in and out over shorter periods of between two and four years and still be investing in tangible assets.

There are some very good deals available as long as investors consider all the factors. These include being aware of where the investor is in the "credit" chain. Investors really need to be the ones with the first charge over the asset.

This means that in a worst-case scenario, where the developer runs into difficulty for example – and this happens all too frequently - there is a trustee available and in place ready to step in. The trustee holds the charge on the investors' behalf and would be in a position to sell the development on enabling funds to be returned to investors.

Too often, developers borrow money from their bank, say, to buy the property, and then offer investors opportunities to develop that property. This means, however, that it is the bank and not the investors that has the first charge, and if things go wrong the investors have to wait in a queue, and may not get their cash back.

Special purpose vehicles (SPVs) are used in a lot of investment opportunities. This is a limited company set up by a law firm. It is separate to the development that takes the investor funds to finance the developer.

SPV scopes vary. In some instances the SPV invests in the developer's equity, in other cases the SPV takes the place of a bank and acts as a lender for debt.

As long as the SPV is set up in the right way, it can eliminate a lot of an investor's risk, ring fencing funds from the development and holding the first charge on each investor's behalf. Most SPVs, if not all, have trustees in place. It's always advisable to ask about an SPV's precise set-up when considering investing.

If investors like what they find from their research they need to study the due diligence pack. Things to look out for include:

  • Who set up the structure - is a solicitor behind it?
  • Who are the trustees – are they UK-based, how established are they?
  • What is the security - are investors holders of the first, second or third charges?

With all three boxes ticked, it could be a good investment.

Banks tend to wait for the completion of each project, and for the return of their funds, before they lend for the next project. But SPV money enables a developer to run multiple developments at the same time, giving more flexibility to operate at a rate that makes the projects worthwhile.

In return for investors giving developers opportunities to turn good profits; developers give sizeable returns on those investments.

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