Considering investing in property and wanting a high yield can be a risky business in the current global real estate sector. Global economic uncertainty caused by the trade wars with the US and China and EU states look to be easing.
Brexit is Done. What’s there to Consider Now?
Whilst there may be arguments over global warming there is no doubting the impact online shopping has had on the commercial retail sector. In 2018 global online sales were around $2.93tr rising to an estimated $3.5tr in 2019 according to a recent article and is expected to continue globally. So, around 19% of all channel sales are made online so why is this important? According to Retail Economics online retail sales is expected to increase to around 53% over the next 10 years.
The pressure on institutional landlords will increase as more retailers enter administration or stop trading on the high street. In the past the commercial sector has seen sound annual returns and been a safe haven for financial institutions worldwide. With the suspension and even closure of some of the world’s top commercial property funds such as M&G UK Property Fund investors are taking a much closer look at where the investment manager is placing their funds.
Many property investors are withdrawing funds from those commercial property funds with a high reliance on the retail sector. Global brands such as Marks & Spencers and Arcadia Group are all looking to close more stores. Other brands are not so lucky and we have seen global brands such as Mothercare, Toys R Us, Debenhams, House of Fraser and many more enter administration in 2019 in the UK. Over 44 top UK retail brands entered administration in 2019 alone. Each one of these store closures means the loss of revenue for the landlords who are often institutional investors.
Where can institutional and experienced property investors find high yield property investments with any degree of safety? What sectors are thriving? Which Countries are more attractive to invest in for property investment? What property investment alternatives are there for global investors?
High Yield Direct Property Investment with a degree of Safety?
Let’s face it direct property investment can be a hassle even where regulations and taxation are not as restrictive as they are in the EU. The EU may be a relatively safe place to invest but the pro-tenants regulations can hit your margins heavily. On the other hand investing outside of the EU may mean less regulation but the likelihood of fraud usually increases. If you have a property portfolio worth $millions you have to remain constantly vigilant where trust can be a scarce and often expensive commodity.
The ideal place to invest may lie within the fringes of the EU with those relatively young EU Countries. Moldova may be a place to check out. To minimise your risks for any property investment take a look at what’s happening on the ground nearby, what is happening with locals and the community for example. There may be a legitimate reason for what appears to be a sound property purchase but ensure you have a recommended local legal insight. Moldova is part of the EU and has the highest rental revenues at around 10% in the main towns and cities and has a flat 10% tax rate on non-residents rental income.
The gains on property sales though can be more complex as they are charged by local authorities and vary generally from 0.05% to o.3% so local knowledge is critical. Actual property values have increased around 8% annually since 2017 nationally but this will vary from region to region. The Moldovan landlord regulations are generally neutral when compared with France, say whose rules are the most pro-tenant. So, if you are looking for a relative high yield direct property investment with a degree of security with minimum EU regulation then Moldova may be the place to look.Thriving Property Sectors GloballyOutside of the EU, UK or, Russia, US generally the housing sector is slowing.
With Brexit behind it, the UK looks to be an interesting place to be with pressure on lower interest rates due to low inflation and increasing wages. The younger generation is now more likely to rent rather than buy with a £200,000 starting price for the average house price. Institutions have been steadily moving away from commercial retail and into the ‘build to rent’ sector. These properties are usually tailor made for the tenants and provide community features not normally associated with the housing sector. Usually positioned in the city centres these rental property investments provide an attractive opportunity. Often attracting under 35s, young families or those starting out but higher than usual incomes they provide a solid base on which to build. One in three of millennials is expected to continue to rent throughout their lives rather than buy. Rental incomes are usually around 10% higher to reflect the additional community benefits and tenant affordability.
With an expected £70bn rental turnover in the UK this rental trend appears to be growing worldwide too as a housing shortage sees no sign of abating. Student accommodation has in the past always been seen as the ‘pile them high stack them cheap’ sector but things are changing here too. Providing rental property for students is seen as the first step in permanent lifetime renting. This trend has spread worldwide so institutional landlords are viewing students in a completely different light.With pressure in inner cities on the cost of development acquisition creative thinking has looked skywards with rooftop development opportunities. Rooftop development is seen as a way of easing green issues whilst obtaining the best bang for your buck. This kind of development uses the latest in building techniques and design which could lead to a simple solution to a housing shortage. The point is of course look for development potential in city rooftops as a home for your money.
The key is to find the right Country and city and that means checking national and local economies. Once you have these get the correct insight by contacting local commercial agents and the local press which may highlight community ideas. Don’t overlook Google Earth as a first stop to mark an area with development potential and/or a cross reference. Which Countries are more attractive for property investment at the moment?First you need to assess what risks you are prepared to take with your portfolio and what restrictions you may have from your investors, mandates and or trust limits. Always check your mandate small print for geographic, taxation, security, currency risk or any philanthropic restrictions. Whether you are a professional or private experienced investor hopefully once you have gauged your allowed limits this should narrow down the potential property development opportunities.
There isn’t enough space in this article to highlight every global property opportunity, however, we can narrow the field down a little. A lot also depends on whether you are looking for direct property investment without the hassle or whether you are prepared to get involved in the management.
Nowadays landlords have to take a far greater look at what is happening in their buildings than ever before so do you really want that hassle? A lot of property investors are backing away from the idea that tenants are now customers and need more services.If there are no restrictions and you are happy to take some capital risk then there are some Caribbean islands with low taxation and Africa’s housing growth are worth taking a look at. Columbia and Indonesia may be worth taking a look at too though both Countries are politically unstable.
In Europe the 2020 IMF Report has highlighted the UK and Germany as the best Countries to invest in setting them apart from the rest of the EU. The property values in Germany saw growth of around 9% in 2019 and with Brexit out of the way the UK housing market has started to see some growth hinting it may be worth a closer inspection in 2020.Interesting Alternative Developments in the Property SectorAccording to a recent PWC reportthere is lots of capital available but fewer opportunities available. The main cause in 2019 has of course been global uncertainty in the markets and the report earmarks London as being of particular interest. The reasoning is simple property values like equity values have been suppressed by the Brexit uncertainty, however, now that has been removed values are increasing as investment flows in.
If you are looking for a hands off approach and looking at simple return on investment then Loan Notes are growing in popularity. One area that has been long established for property capital raising in the US and is gathering more popularity in the European Countries is property development loan notes. Loan Notes are company loans and technically very similar to bonds, however, are not transferable. Loan Notes have long been established with institutions and are now becoming more widely known to experienced property investors who in the past have been happy to remain landlords. With more and more responsibilities landlords are beginning to see the benefits of becoming a lender rather than a borrower.
There is the option to borrow and manage a property with average returns of 8% gross. There are also alternative property investment options such as loan notes. Loan notes can offer similar, and in some cases, greater returns with less investment of additional resources. Of course, you have to identify the correct property developer and development and this is an area certainly worth more investigation for suitable investors. To those experienced with loan notes, there are some interesting ‘notes’ available across the EU and it may be worth gaining access to our Investor Lounge to see what is happening in this sector.