‘Buy to let’ has been a popular investment over the last few decades and it’s easy to see why. With mortgage rates at low levels and house prices on the rise, the asset class has had a lot of appeal.
However, in more recent times it has become harder to make the case for buy-to-let property as an investment strategy. Due to a confluence of factors, the profits are not what they used to be, and the numbers no longer make sense for many investors.
In this article, we highlight some of the challenges buy-to-let property investors face today. We also explore some alternative real estate investments that could be worth considering as part of a diversified portfolio.
Buy-to-let market dynamics have changed
In recent years, the buy-to-let property investment landscape has changed dramatically.
For a start, interest rates have risen significantly, pushing mortgage rates up by hundreds of basis points. This higher cost of borrowing has made property investments far less profitable. According to Hamptons International, a basic-rate taxpayer now needs to purchase a rental property with a 7% yield to make an after-tax profit.
Secondly, taxes associated with buying and owning property have significantly increased. In the past, landlords could offset mortgage expenses against their rental income. Today, however, buy-to-let landlords have to pay Income Tax on their entire rental income, irrespective of their mortgage interest costs. Meanwhile, Capital Gains Tax (CGT) allowances are falling.  For the 2024/25 tax year, the annual CGT allowance is set to be reduced to just £3,000.
Additionally, new regulations have pushed investment costs up. Energy Performance Certificates (EPCs) are a good example here. Currently, landlords need to have an Energy Performance Certificate with a minimum rating of ‘E’. However, new government proposals could mean that landlords are required to have an EPC rating of ‘C’ or above by 2025.
Put all this together, and the once-compelling case for buy-to-let property now looks a little shaky.
Why invest in alternative real estate investments?
The good news if you love property as an asset class is that there are many other ways to invest in property.
Today, there are a range of alternative real estate investments that can enable investors to enjoy the benefits that property can offer as an asset class – such as long-term capital gains and steady income – without having to invest in, and manage, individual properties themselves.
And investing in these alternative forms of property can have many advantages. For example, they can often be purchased within a tax-efficient investment account such as a pension or ISA, meaning that capital gains and income can be sheltered from the taxman.
They can also offer more diversification. With these alternative real estate investments, it’s possible to gain exposure to a range of different types of property.
Additionally, they can be far more liquid than residential property. For instance, with some alternative real estate investments, you can sell assets – and have access to your capital – within days. With residential property, disposals can often take months, or even years, not to mention the costs associated with selling physical property
Overall, there are many benefits to investing in these property assets.
Types of alternative real estate investmentsÂ
Some of the main alternative real estate investments include:
Commercial property via fundsÂ
Commercial property is property that is used for business activities. It includes office buildings, shopping centres, hotels, warehouses, hospitals, and more. From an investment perspective, commercial property has a number of attractions, including:
- Higher yields – Commercial property yields are generally higher than residential property yields.
- Long-term leases – Leases are typically between three and 10 years.
- Income growth – Leases often have built-in rent increases.
- Potentially lower costs – For example, maintenance is the responsibility of the tenants.
- Exposure to economic trends – Commercial property can provide exposure to powerful, long-term economic trends.
The easiest way to invest in commercial property is via investment funds. These pool together money from many investors so that the investment managers of the funds can make large investments.
One major advantage of commercial property funds is that they can be held inside tax-efficient investment vehicles. Another is that transaction costs are generally low. With these alternative real estate investments, you don’t incur the same level of costs that you would when buying residential property (e.g. stamp duty and agency fees).
Real estate investment trustsÂ
Real estate investment trusts (REITs) are investment companies that own property portfolios. They are similar to regular investment funds in that they pool together capital from many investors and make large property investments. However, the key difference between REITs and regular property funds is that REITs are traded on the stock market (meaning that they are very liquid).
In the UK, REITs are required to distribute 90% of the profits from their property rental businesses to shareholders. So, they can be an excellent source of income.
Using alternative real estate assets to build a diversified portfolio
When it comes to building a solid long-term investment portfolio, alternative real estate investments can play a key role.
These investments tend to have a low correlation with stocks and bonds meaning that they can enhance diversification. They also tend to be less volatile than traditional asset classes which means that they can cushion against market downturns.
It’s important to be aware of the risks associated with alternative real estate investments, however. Before channelling your hard-earned money into them, it’s sensible to seek professional guidance.
At Bowmore, we help investors build diversified investment portfolios that are aligned with their goals and risk profiles. We understand that investors want to allocate capital to property, and we can help you invest in the asset class tax-efficiently.
To find out more about how we can help you invest in non-residential property, contact us here or call us on 01275 462 469.
- Bowmore Asset Management Ltd is authorised and regulated by the Financial Conduct Authority
- Bowmore Asset Management Ltd is not regulated to provide tax advice
- The value of your investments can go down as well as up, so you could get back less than you invested
- The tax treatment of certain products depends on the individual circumstances of each client and may be subject to change in future
- Past performance is not a guide to future performance
