Finding new investment opportunities for clients is a tall order in today’s economic climate. With interest rates on cash deposits at an historical low, and many retail investors reluctant to invest more money in equities after a tough year for the UK stock market, clients are looking for alternative sources of income from their adviser.
Unlike many of our European neighbours, owning property has always been at the heart of UK wealth and investment.
Indeed, buy to let has been one of the investment success stories over the past decades for those investors who bought early – and bought wisely. But experts are now questioning whether yields on UK rental properties can be sustained in the long run. Tighter rules on mortgage lending, the prospect of higher interest rates in the medium term, and the saturation of the buy to let market in popular rental areas mean that this type of investment now has a number of drawbacks.
For example, landlords were once able to enjoy good returns from buy student properties and letting them out as multi-occupancy units. However, in recent years universities have been building their own student accommodation, meaning that there is more supply than demand in some university towns and cities.
Also, northern England was a popular location for buy to let investors who bought relatively cheap properties and enjoyed good rental yields. The rise in house prices has meant these properties no longer offer the same attractive yields.
So if the UK housing market is looking overheated, where should investors look next? Many have been tempted to venture further afield into Europe where property is relatively cheap compared to the UK.
However, it is expensive to buy properties in France and there has been bad publicity around some developments in Spain. As a result, US property has emerged as a possible alternative to the Eurozone. One of the difficulties in being an absent buy to let investor is the issue of maintenance. It can be costly and time consuming to maintain, monitor and administer individual properties in the US when you are based in the UK.
Then there is the issue of finance – traditionally, buy to let investors needed either to raise funds against the value of their own home, or set up a mortgage in the local currency. A way round this is to direct clients towards pooled investments, where their money is combined with that of others in order to buy shares in property investment funds, or directly in property itself.
Both options take away the need for the investor to arrange mortgage finance, deal with US taxes, view and maintain properties, and sell individual units if they wish to realise their capital.
There are a number of UK fund management companies which offer property funds to retail investors. These tend to be focussed on capital growth, and are regarded as a medium to long term investment.
If clients are looking for income, then they could consider a pooled property investment which buys and owns US accommodation and then pays a yield based on the rental income. To reduce the risk for clients, look for a company which aims to protect the initial capital sum and pays income out of rental yields, not capital erosion.
Clients need to bear in mind that there is a currency risk – but this can work in their favour as well as against them, depending on when they choose to sell. In addition, by buying a pooled investment they won’t have to sort out US taxes on an individual basis, nor will they have the challenge of trying to raise finance in a foreign country.
If your clients are looking to diversify their portfolio overseas, and they are aware of how exchange rates could influence their returns, then this could be an option for you to suggest to them.