According to Savills, the cumulative value of all the world’s real estate is roughly $326.5trn.
It is a figure so large as to become almost meaningless. Perhaps it is better to say that property is the world’s biggest store of wealth – more than precious metals, more than global stocks and shares, more than any luxury asset.
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Peel back the layers and this fact is not surprising. After all, real estate has been a fundamental, essential part of human society ever since our nomadic ways were left in the past. It follows, then, that investors would view bricks and mortar as an attractive asset class, and one that has been highly sought after for centuries.
What is most interesting, however, is how investing in real estate has evolved, particularly in recent decades. Not only has the type of property that people (and institutions) invest in changed over time, so too has the profile of the investors themselves.
Buy-to-let no longer reigns supreme
For the past century, as the mortgage market has grown and matured, buy-to-let (BTL) has become the archetypal mode of property investment. The appeal of being a landlord – either acting as an individual or institution – is easy to understand: the investment combines the potential to achieve long-term capital growth on the asset’s value with an ongoing rental income from the tenant.
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Putting aside current speculation that house prices are going to fall in the coming year, historic data underlines the healthy growth of UK house prices. In January 1993, the average UK house price stood at around £53,500 ($69,462). Fast-forward 30 years, and this figure had risen to £290,000.
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By GlobalDataHowever, BTL investments are not nearly as attractive as they were at the turn of the century. Since 2016, reforms to mortgage interest relief, additional stamp duty, regulatory changes in the rental market, the introduction of new rules around energy performance certificates, and now higher interest rates on BTL mortgages have all added significant cost and complexity to the BTL market.
The result has been bold predictions of there being an ‘exodus’ of landlords from the BTL market. Rarely a week goes by without such predictions being made – but it seems highly unlikely.
Yes, BTL investing is not as simple nor, in many instances, as profitable as it once was, but it is still attractive to many. Indeed, the majority of landlords do not intend to sell any of their properties in the coming year, let alone entire portfolios.
However, while talk of a landlord exodus seems overblown, we cannot shy away from the fact that investors today are increasingly considering alternative ways to profit from bricks and mortar.
Technology and alternative investments in real estate
The truth is that even before BTL became more complicated, this type of investment did not appeal to certain investors. Owning an asset that needs to be managed and let to tenants, with regulations to comply with, is high maintenance, even when using an agent. Further, for other investors, this type of investment was simply out of reach – it requires significant capital expenditure to purchase the asset in the first instance.
Instead, what we have increasingly seen throughout the 21st century is that property investment has been opened up to a much wider pool of retail and sophisticated investors.
This is the result of two converging trends.
Firstly, technology. There have been great technological advances within the investment sector in recent years, as app and web-based investing has become increasingly prevalent. This has played a particularly important role in disintermediating investment opportunities. Brokers, asset managers and advisers are no longer the gatekeepers that control who can pursue a particular investment, with easy-to-use and easy-to-access technology creating a more equitable investment landscape.
Late in 2022, Shojin commissioned an independent survey of 690 UK adults, all of whom had investment portfolios worth in excess of £10,000 (not including savings, pensions or property that is used as their primary residency), which shone a light on this important point. According to our research, almost half (48%) of UK retail investors said that in the past five years, online and mobile investment platforms had opened up new investment opportunities that they could or would not have accessed before – and among those aged 18–34, this figure leapt to 73%.
The second trend is the rise of alternative investments including fractional property investments and peer-to-peer lending.
As noted, investing by way of owning property comes with barriers to entry (cost and access to products such as BTL mortgages), and ongoing complexity (regulation, legislation, tax and so forth), but what we have seen is a shift from equity-based real estate investing towards debt-based real estate investing. Where the latter is concerned, an investor can provide capital to a developer or asset manager to achieve interest on that investment over a set period.
Debt-based crowdfunding for property developments, such as the opportunities offered by Shojin, can open up real estate-backed investment opportunities to investors with minimum investment sums of £5,000, or less in some cases. Again, technology plays an important role here in helping bring together a ‘crowd’ of investors for a single property development or purchase, allowing more investors to partake in real estate investing.
Opening up new opportunities
Property investment is no longer the preserve of high-net-worth individuals, institutions, funds or trusts. It has been democratised thanks to the breadth of opportunities now available and the accessibility of them.
The simultaneous rise of alternative investments and technology to facilitate them has opened up a new world of real estate investment, one that is more open to retail investors and sophisticated investors, and one that fundamentally structures property investment differently from the previous models.
Ultimately, bricks and mortar remains an attractive asset class to investors globally, but it no longer has to come in the form of BTL portfolios or institutions financing property developments. This is a positive development for the real estate sector and will be an intriguing trend to monitor in the years to come.
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