Better than buy-to-let [Members]
For MOGULS by The Investor
on August 31, 2024
What if you could earn an income and long-term capital gains from residential property without scrabbling around with shady agents, unreliable tenants, and overpriced, untrustworthy tradespeople?
The historical attractions of UK property are clear (albeit past performance is no certain guide to future returns). Owning houses has made many people rich, as some of them never tire of reminding us.
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Very interesting. Thank you @TI. Did you consider when looking into the UK property sector (really property sectors plural I suppose) the Impact Healthcare REIT (IHR)? Sits on 23% discount and 7.6% dividend. By 2040, one in seven in UK will be over 75, exacerbating shortage of care home beds and supporting rents (number of >85-year-olds forecast to grow 60% by 2036, requiring an additional >14k beds pa, with only c.4k beds p.a. in pipeline).
I’ve always used Loanpad to gain some alternative property exposure, having also accidently acquired two BTL properties over the years. Only one left now and its disposal is imminent, for all the reasons listed above.
P2P isn’t to everyone’s taste, but I find their flexible ISA quite useful.
> some people still argue owning your home is not an investment nor an asset
As one of these recalcitrant refuseniks, I’ve softened my position. Asset yes, investment no. A bit like your kidney – asset yes, investment, no, ‘cos it’s tough to live without. Your BTL tenants’ houses, sure, investment and asset. Your own house, not so much investment.
The essential characteristic of an investment is that it is an electively owned ‘asset’ that disposing of it doesn’t change you life immediately for the worse (or better which is what BTL LLs keep telling us is the case)
Your S&S ISA, cash in the bank, pound notes in your mattress, gold dug into your garden/held in paper form, wine in your cellar, you can transform all of these into other electively owned assets, and you can choose to go without some of these assets. Some investors only do BTL, some forswear owning some assets like oil firms or tobacco, or barbarous relics like gold. Not many living on the street I’ll guess.
You see the same prejudice in the definition of high networth individual
These assets are sometimes termed in the financial services industry as investible assets. Your residence isn’t an investible asset there, I suppose your holiday cottage/second home may be.
I do get the point that you can perfectly well sell a house and rent s similar space. Trouble is that in the UK there is such a world of hurt in one of those options that you just can’t draw an equivalence.
ISTR that Grainger plc (GRI) does the same sort of thing as Mountview with thousands of ‘regulated tenancy homes’ on their books, presumably taking the uplift when these tenants peg it. Given that regulated tenancies stopped in 1989 these folk will be about 55 and up, assuming they were 20 or older when they signed up.
@ermine — Thanks for the extensive comment, and I acknowledge that your position has softened! 😉
Obviously I still think it’s wrong to say your own home isn’t an investment, though at some point we’re just talking about what a word means to an individual I suppose.
My definition of investment would be something like “foregone capital that is instead of being spent on a consumable good is used to buy exposure to a liquid(ish) asset, usually (but not always) in the hope of future gain, income, or some other benefits.”.
(So I’d argue even cash savings are an investment, certainly in any kind of fixed-rate account. Maybe not an annuity? Not sure, I’m thinking out loud here).
Homeowners meet my definition of investment when they buy a home. I don’t believe more than low single-digits think it’ll be worth less than they paid for it (or even the same) after some reasonable number of years.
Renters either spend all their money or save into other assets.
Your argument that there’s a flaw in my reasoning that a investment-home cannot be sold because who would want to do is very unconvincing to me. If anything it comes close to amplifying my point.
Many millions of people do rent, either through choice or need. This isn’t a philosophical model where we have to stretch reality to make a point! We see the two choices playing out every day. Renters rent, and after X years they have nothing to show for it. That was me for 20-odd years!
Perhaps if the state owned all homes and ‘buying’ involved putting down money and getting that same money back when you moved and ‘sold’ back to the state (so more like a chunky rental deposit) then we could talk about it homes not being an investment. As opposed to a world where prices have gone up 400-500% over the full term of a mortgage and virtually all new buyers do so expecting they’ll see something like the same (rightly or wrongly).
Curiously I always find it’s usually homeowners who argue that a home isn’t an investment. Those locked out of the housing market for whatever reason are under no such illusions!
Even most of the US gurus who like to moan about the cost of home ownership and argue the return is far lower than commonly believed almost invariably own home (or more than one…)
“Go figure” as they would say. 😉 People who don’t like Bitcoin seldom have high six-figure sums in Bitcoin, for a contrasting example.
Yes, I mentioned Grainger in the article. 🙂 Agreed it’s certainly an alternative if you want UK residential property exposure. Probably not the same value opportunity (hopefully) there though.
p.s. I did think of you when writing the piece and dreaded an “Ermine has cancelled his subscription” message on the grounds of my advancing a case turning on (your) most hated asset class — so cheers for toughing through it 😉
@Gareth Austin — I’m not familiar with that platform. It seems to be based on loans, not property ownership? Are the loans primarily written to homeowners / secured against property? I would say that’s a bit tangible to the attributes of property as an asset class, personally — like shares in homebuilders I’d argue it’s more exposure to the property cycle.
On the subject of crowdfunded home buying while we’re at it, I’ve no experience of any of the P2P property platforms. Curiously perhaps, I love the idea of them, but when friends have asked me about them I’ve tended to demure and point them towards a global tracker fund.
I guess I fear that none of the scale / status to be truly confident about them (a) overcoming the frictions of so many multiple owners and the need to generate an additional return for the platform’s owners and (b) them being robust enough to survive an early 1990s-style property crash.
I wonder what would happen if everyone went for the exits at the same time? Presumably they would gate. Otherwise the weakest hands at the margin would sell their shares in a particular property cheap, so marking the cost of the whole down very severely. In a pretty liquid market other buyers would step in to prevent peppercorn prices (even iffy small cap shares find a floor in a bear market for that reason) but that requires confidence in the platform overall I suppose.
Be interested to hear anyone’s experiences (and/or more about Loanpad, Gareth, if you have a minute 🙂 )
@DH — As is usually the case, here I’m a bottom-up stockpicker. I didn’t start with property as an attractive asset class then survey all candidates, by contrast. As I’ve written before in response to a similar question, I don’t believe I have the resources to do anything so exhaustive versus the market / Bridgewater / whatnot. 🙂
On the healthcare sector, I have held Primary Health (PHP) on and off. Similar argument, runs upscale GP medical centres, State-backed rents, much more debt than one would ideally like. However I thought the price falls were overdone when it started to plummet with rate rises and I feared the market knew something I’d missed so I sold.
I’m very likely to look more deeply into that one again though. It’s likelier that many of its holders just preferred gilts/cash for income when given the option, I suppose, and inflation might have done a bit of a number on the debt in real terms 🙂
Thanks @TI. IHR came to my attention through David Stevenson’s Adventurous Investor Substack (22 August). There’s too many ITs in the property sector to know where to start without a steer in terms of due diligence, i.e. (not a complete list):
Property Residential: HOME (a howler), GRIO (another howler), RESI, SOHO (possibly yet another problematic one, but with encouraging signs of improvement), PRSR
Property Securities: TRY
Property Logistics: WHR, REW, SHED, BBOX
Property Healthcare: IHR, THRL
Property Commercial: RGL, AIRE, API, AEWU, SREI, SUPR, EPIC, BCPT, LXI, VIP, CREI, LABS, UKCM
Without a guide or stock screen to get started the temptation is just to go for a property tracker like VanEck Global Real Estate ETF (TREG).
As an asset class property is pro-cyclical but maybe it shares some qualities with commodities in that it might do well during a high inflation and negative real rates scenario. Good (high) yields in this sector, which may turn out to be a good or bad thing of course 😉
Excellent write-up of a classic value stock. It reminds me a bit of (since liquidated) Alternative Asset Opportunities:
https://wexboy.wordpress.com/2012/11/21/an-investment-to-die-for/
@TI I consider your concerns about Loanpad completely valid. The P2P space felt like the crypto space period prior to Covid. The post covid fallout of a number of the ‘providers’ probably warranted the comparison. The returns rarely exceed those of a MMF, so I consider it just a diversification play. I consider it more transparent than a lot of the other things I invest in, but I would never recommend it to anyone I know (although I never recommend anything). I view it is as exposure to bridging/developer loans, which give me some second order exposure to the market my BTLs compete in. Sensible LTVs, lending partners for each loan and first charges over the property in question would be their justification for risk apetite. Potential to freeze funds, definitely, but so did lots of the big property funds…
I hate being a landlord (after nearly 20years of it, enforced by military service and children arriving), but always tried to be a decent one. I drew a number of parallels to Finimus’ article on the subject last year.
Our current primary residence is small for our incomes and wealth, but won’t be for ever and constitutes about half our property porfolio (although covid also changed that ratio as everyone fled to the country). I wanted exposure to the property market to protect against property prices so we were still in the game for the upsize in 5 years time.
Anyway back to reading up on Section 21…while retaining some humanity.
Thanks for posting this @TI, really interesting. Particularly pertinent for me personally having finally managed to extricate myself from accidental landlordship of a London flat after years of brexit, covid, combustible cladding and rate rises keeping me in a cycle of failed efforts to sell between tenancies. Being a small time accidental landlord was like being an increasingly unwelcome guest but finding all the doors locked. Very much 1st world problems of course.
I recycled some of the capital from that sale into a basket of infra trusts, REITs and one or two income trusts. A portfolio of decent quality long duration £ income plays at what was (seemingly at least) discounted prices for trusts broadly and particularly those rate sensitive segments felt like I was keeping some exposure to a recovery on lower rates and buying into quite attractive dividend streams if capital values and dividend growth do broadly keep pace with inflation from here a defensive ~6+% real return seems decent risk reward for those asset classes in my view at least. And to your point, the benefits of collecting dividends from listed securities versus managing a property directly are extensive!
In PRS I had also looked at Grainger in some detail, in my view a fantastically well positioned business given the supply constraint – scale, modern quality assets, solid development pipeline and ~20% EPS CAGR for a good few years to come as new developments complete, low LTV, conversion to REIT status boosts EPS next year etc etc. To your point though the valuation is the problem, would love to own it just not at a 2% earnings yield.
Found your piece on Mountview super interesting, potential to unlock value seems compelling, as you say I guess much comes down to the question of whether the management are both capable of fully realising it and sufficiently aligned with you as a shareholder to do so.
Excuse the dumb question but when you talk about buying inside the spread is that just a question of keeping a limit order somewhere around the mid price and being patient?
On the healthcare REITS – FWIW I personally think Assura is worth a look alongside PHP. Through luck or skill they did a great job of terming out debt at the right time, started 2022 with a weighted average cost of debt fixed at 2.3% and the major blocks of refinancing in 2029, 2032 and 2034 vs PHP at 3.3% and more immediate refinancing coming. Similar LTV. Assura since acquired a private hospital portfolio and took on some higher cost debt associated with it but still a materially better balance sheet and yet higher earnings yield (8.2% vs 7.2%).
@Delta Hedge — I don’t think one can take a view on non-residential commercial property, or at least offices, without having a view on working from home now, especially in the UK. London is still nothing like back to peak office population, yet at the margin companies are complaining of insufficient supply of the truly top-quality stuff in the right places that might tempt more of them back.
It’s a fascinating question whether this is going to be a secular change in property demand, or if it’s just lengthened the cycle (/recovery) by reducing supply which will eventually support occupancy and put a floor under (lower?) values.
I did very well from London-focused REITs in the years following the GFC (two were even taken out at a big premium!) but I’m much less clear what to do this time.
@Owl — Thanks very much! Ah yes, used to enjoy reading Wexboy in their pomp 🙂 A shame that blog is now so moribund.
@Gareth Austin — Thanks for the extra colour. Just to play devil’s advocate, are you sure you’re getting diversification versus a MMM fund? I suppose some time diversification, if you’re able to secure longer loans (/lock in rates) via the P2P sites, albeit for credit risk.
Very interesting to hear how you’ve not taken to landlord life, despite the many years at it. I sometimes think of renting out my flat for a couple of years to do the global nomad thing and the idea of tenants and smashed fittings and calls to Vietnam or wherever I am about noisy parties gives me the shakes. It’s all so close-up and personal. Give me the intangible ‘fugazi’ of stocks any day 😉
@AoI — “Being a small time accidental landlord was like being an increasingly unwelcome guest but finding all the doors locked” — very nice turn of phrase, want to write an article for us here? 😉
Re: Spreads yes I occasionally set a limit order, almost invariably to expire same day, but with Mountview (and some like it) I also just mean you’ll probably find when you go to buy you’re offered a price that is way inside the bid/offer spread.
Today Mountview was trading at £92/97 for a bit, but it was easy to buy at least small amounts at just under £93.
The flipside is a few shares like MTVW can send your tracking spreadsheet haywire as your portfolio value careens up and down with often random seeming buys and sells at the limits of the spread.
Cheers all for the further thoughts and other property ideas. Super interesting sector at the moment, but clearly lots of traps for new players! 😉
@TI #10: on your question “whether this is going to be a secular change in property demand, or if it’s just lengthened the cycle (/recovery)”: Callum Thomas of Top Down Charts this week thinks that many technical indicators are aligning for REITs, which could (perhaps, and if correct), play out well for other property based shares, like Mountview Estates:
https://open.substack.com/pub/topdowncharts/p/chart-of-the-week-reits-rising
Just a thought from reading @TI’s introduction to the Weekend reading (“looking for gain from the CGT pain”) today.
Mountview Estates might be able to pick up some portfolios of regulated, assured shorthold or life protected sitting-tenanted properties on the quick – i.e. before the 30 October Budget – if landlords are looking to sell up in anticipation that CGT rates could/will rise.