Property profits are not just for homeowners
Renting can affect people's wealth for life, but long-term tenants could still buck the trend
Sunday 28 October 2012
The race to homeownership has long been a British obsession, carrying with it the unspoken stigma that if you rent your home, you are a financial failure, one who should be desperately saving to reverse your fortunes.
With mortgages still hard to come by and average deposits now in excess of £26,000, renting is becoming a long-term reality for many, but it seems the knock-on effects for a renter's personal financial wellbeing are worrying.
New research from insurers Aviva claims the average British homeowner aged 25 to 34 is around seven times wealthier than those who rent, with assets amounting to £98,686 compared to just £14,258.
And by the age of 65 those who couldn't afford to buy, or chose not to, have just £62,258 to their names – far less than the £306,147 homeowners can boast.
"The trend is divisive," says Brian Hall, a director of housing analysis firm The Model Works. "It will group people into a property owning elite and those unfortunates who are forced to rent from them. It will hit young people at the most fundamental level in terms of their ability to put a roof over their heads, pay for the essentials, start a family and plan for the future."
But this is only part of the story. Regardless of how important it is to individuals that they own the roof over their heads, one of the major drivers behind our national homeownership devotion is the underlying potential to make a little money from the property asset class.
Historically, the only way to benefit from the long-term rise in house prices was to take out a mortgage and with it the risk that prices could also fall. But that has locked those without a deposit out of the market. However, recently, other options have opened up.
"Whatever the reason for someone being out of home ownership, the investment market can and should provide an answer which enables people to maintain exposure to the asset class without having to own the property themselves," says Christopher Down, the founder of Hearthstone Investments.
His firm launched earlier this year and allows private investors to put a minimum of £1,000 into a fund invested in privately rented property across the country driving a return from both the rental income generated as well as any capital uplift in the value of properties that underlie the fund.
Down claims between 2006 and 2011 an investment of £5,000 in a bank account would have yielded £5,317; in a commercial property fund £4,646; in UK equities £5,245 and in his own fund £6,223.
"When I was saving for a deposit I was chasing a moving target – by the time I actually bought I was short because house prices had risen and the deposit rate had changed," he explains. "Ultimately, most people do want to buy for themselves, but they're missing the first couple of steps on the ladder. This is a product that moves with the market while you're saving. That's when you get out with your 10 per cent deposit and get a better deal on your mortgage."
Meanwhile, Castle Trust has launched a range of fixed term investments starting from £1,000, called HouSAs, which link to the performance of the Halifax House Price Index.
As with any investments there are risks and all the experts warn that qualified financial advice is an absolute must.
Because Hearthstone is an open-ended investment company, when an investor wants to withdraw capital, the fund has to be able to supply this cash to them. This caused problems in 2007-8 where commercial property funds were unable to return money to investors quickly in the credit crunch.
The Castle Trust product meanwhile offers a guaranteed return by locking customers in for a fixed timeframe which can result in penalties if you try to get your money back early.
"I cannot emphasise enough how important it is to take advice with this kind of investment," says Roy McLoughlin, a financial adviser at Master Advisers. "I'm not saying they aren't a good idea, but investments come down as well as go up. And, of course, there are always fees and administration costs to think about."
For those who still harbour the desire to buy their own property in the future, McLoughlin says this type of investment should be seen as a second or third step in the saving process.
"Britain is bad at saving," he says. "But the best way to get started is to set up a cash ISA and a regular direct debit every month. If you can be disciplined about bolstering ISAs whenever you can it is possible to save quite a bit quite quickly – even if it's just £50 a month."
Once your annual ISA limits are reached those looking for a bit more risk and the potential to make savings work harder should do a full risk review with a qualified financial adviser.
"Investment is going to be based on your risk attitude, be that cautious, balanced or speculative," says Colin Payne, an adviser at Chapelgate Associates.
"Once you've taken full advantage of tax free allowances, then you could look at unit trusts or open-ended investment companies which are run on a very similar basis."
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