For years, dating back to the middle ages, real estate has been a popular way for one to build and preserve their wealth. Merchants would buy, sell and rent houses on the land of their feudal lords.
However, to operate at the level of institutional-grade opportunities has required investors to be among the wealthiest 1% of people globally. At any level a moderate to considerable amount of capital is required to become a landlord capable of generating sizeable returns.
Luckily for investors, the market is forever changing and there are alternative ways individuals can invest into real estate that are open to everyone. The idea of investing in a buy-to-let is not as enticing as it once was due to tax implications and tighter regulations attached to them. People would usually buy the whole property whereas now technology enables fractional ownership – this means people can invest smaller amounts in a number of different real estate investments.
Within the buy-to-let space, we have witnessed an erosion of rental yields in the last decade, despite recent rises, culminating in 5.5% average across Britain in Q4 2021. Add to this fact that regulation is also against landlords, with tax relief for buy-to-let mortgages being consigned to the history books and the picture begins to look bleak. Whilst unfavourable changes to regulations have been a thorn in the side of those looking for investment opportunities in property ownership, accelerate the COVID-19 pandemic has onlyd the decision for many landlords to begin winding down part, or all of their property portfolios.
In the annual survey of City bosses by Lloyds, City firms are bullish about London’s future as a global finance hub. More than two-thirds of financial institutions believe that the removal of EU red tape will reassert London as a global center for trade and finance as firms anticipate and adapt to the new regulatory environment.
It seems likely that UK property investment will benefit as a whole from a post-COVID, and arguably post-Brexit bounce, with the market poised for a significant digital disruption. This is where the new alternative ways to invest in real estate will gather pace. To give you a flavor of the opportunity, the online real estate investment market is forecast to grow from $15bn to $800bn by 2027.
When people think of retail property investments, they think of buy-to-let investing, but actually there’s a huge spectrum of investments there. For example, you could invest in a development project whereby the profits are shared among multiple investors. Buying an asset is only one small part of it real estate investment. What a lot of online platforms are now enabling is for investors to access all these different parts of the market with a plethora of funding options.
These could include your money going into development equity, mezzanine loans, bridging loans and asset finance provision vary where the risk vs reward will, matched to your investor appetite. In these scenarios, the opportunities to invest extend far beyond the traditional buy-to-let concept, which is naturally more limited and dependent on market growth or contraction.
When looking at real estate investments, individuals need to understand that it is not the simple liquid investment that one may get from pensions, or bonds, but it can provide a safer investment compared to other alternative investment opportunities such as cryptocurrencies. Property is considered a particularly useful asset class, especially for people looking to diversify. This is because the property is mostly decoupled from the stock market, making it relatively sheltered from market fluctuations.
With the advent of digital investing through online platforms, direct investing is becoming more prominent. Naturally you have the platforms that allow investment into shares and bonds, but now you have platforms that also allow fractional investment into opportunities that they were previously locked out of. This includes real estate, private lending, development equity, pre-IPO and all manner of other investments. These platforms also enable disintermediation, so that investors can invest directly into companies and opportunities without layers of intermediaries, and they get to keep more of the upside on profits.
It’s this portfolio diversification that can really make an individual’s savings go further and the forward march of technology will continue to create new and better investment opportunities. For the past 40 years, investors have relied on traditional fund managers to manage their investments, both savings and pensions. Unfortunately, investors have been let down.
While the majority of actively managed funds underperform the market, there are many layers of fees and fund managers still get well compensated while the investor loses out. I see a brighter future, in which investors will have fully diversified, self-managed portfolios with investments that reflect their own views on the market and many of those investments will be in the form of direct investments, giving investors total control.