By Neil Young, written September 2020
I have been investing in the living sector since the mid 1990’s. I have also been working in the living sector for most of that time. I’ve written a lot about the living sector. Many of my musings are about the customer focus I’ve always adopted. But I have not written as much about investing in the sector.
I have always liked to see myself as an innovator, a pioneer. Looking for where an opportunity may arise. How can you link trends to see a new market? The Housing Act of 1988 was when the Assured Shorthold Tenancy (AST) came into being. However, it was only when buy to let (BtL) mortgages were launched in 1996 that the private investor came to the fore.
When we first invested (in London), BtL 5-year fixed rate mortgages were 5-6% for an 85% loan to value lend. Gross yields were 6-7% and service charges were at reasonably sensible levels. Internet played a small part; local agents were the main driver. Service was distinctly average, the product varied at best. What a great opportunity to invest.
But why did we invest?
It was purely pension planning. If we took out a repayment mortgage, paid it off over 25 years we’d be left with a good pension income. However, along the way, we also learned about the importance of gearing (borrowing) to drive capital returns.
We focused on our 10-minute rule. The property had to be within 10 minutes of:
- Convenience stores
- Good transport, whether existing or being built
We also looked for properties where we could add value. We wanted to be long term investors. Our view was there were too many costs buying and selling (plus tax) to make trading sensible. We wanted to minimise our cash invested by gearing and look after the resident.
So why am I telling you this?
Well fast forwarding to today, what have we learned?
- Invest for the long term
- Understand your market
- Don’t hold and wait for value increases, you’ve got to add value through service and product enhancements – read our related blog
- Applicants/residents have become more demanding
- Nurture relationships
- Changes in tax regime making returns more challenging
So, we have over the last year or two been looking at the next phase of our personal investments. This is certainly going to be a period of focusing on income. With the base rate (virtually) at zero, it is difficult to see significant capital growth in the main residential markets.
So where/how to invest?
We are looking at investments that are asset backed and offering higher yields. Secure income. Whether this means we are buying the property or just loaning funds to an asset backed investment matters little as long as there is a good safe return. The sectors that seem to offer this are student accommodation and co-living/shared housing. Don’t think it is easy, it’s not. It takes a lot of time to find the right opportunity and then progress it. It is also difficult to do it on your own. Residents are more demanding, and you need to be able to have a team focused on the service side. Self-managing properties in amongst busy lives is challenging.
Our first focus is the student market. We realised to really deliver we needed to set up a student accommodation business ourselves. Over the last 25 years we have gained so much experience in the living sector, it is exciting to again put it to good use. We are investing to reset the student accommodation market to a new standard and helping to shape the future. We are focusing on a great product and amazing service – we will be providing proper homes for proper students. This has always been our hallmark. Read David’s recent blog about the business.
How does this help you?
We realise investors like balanced portfolios. You also want a balanced life. There’s enough hassle and uncertainty to deal with these days. Which is why we will be offering investors the opportunity to receive a 6% fixed return through our student business. Sound good? Better than the bank? If interested, please contact me.