A new book from consumer group Which? claims that it is still possible to make a healthy profit from investing in property, despite the current falls in the market.

The Property Investor’s Handbook says that, although it is now more difficult to make profit from traditional property investments such as buy-to-let and renovation, canny investors can still provide for their future by putting money into less conventional investments such as commercial property and investment funds.

Do your homework
Kate Faulkner, the book’s author, insists, ‘When the housing market is unstable, property tends to fall out of favour as an investment. But many people don’t realise that property investment opportunities come in many forms, from investing in a property fund to snapping up pieces of land.

‘If you’re thinking of having a go, my advice is to really do your homework. Make double-sure you know exactly what type of investment is right for you, how much you can really afford to invest and whether property will give you the return you’re looking for.’

Buy-to-let
The most popular way of investing in property is to invest directly in the residential market. While it is not quite the ‘hot property’ it once was, investors looking for steady growth are still investing in the buy-to-let (BTL) market. Industry experts predict a solid future for BTL and say, although the days of rocketing short-term capital growth are gone, long-term investors are still set to benefit.

According to the Building Societies Association (BSA), most people investing in property do so with long-term horizons. Many (89 per cent) see property as a good investment for their pension, and 89 per cent also think that, in the long run, property prices will definitely have risen. Only one per cent of investors would sell immediately if property prices fell considerably, and more than a quarter (27 per cent) would look to buy more.

To buy a BTL property, investors need a deposit, normally of around 15 per cent, and a BTL mortgage. This is different from a mainstream mortgage because, instead of basing how much they will lend you on your income, lenders base their decision on how much you can rent the property for. Most require the rent to more than cover the mortgage, leaving the landlord with money left over for repairs or to pay the mortgage during void periods.

Harder to raise the cash
But the credit crunch means that getting a BTL mortgage – or any mortgage – is subject to tighter criteria than previously. Melanie Bien, director at mortgage broker Savills Private Finance, says, ‘The mortgage market is tougher at the moment, as the liquidity crisis means there is less money available for lenders to lend to us. This means that lenders are looking more closely at who they are prepared to lend to.’

She adds, ‘On buy-to-let loans, rates are still competitive but fees are high. Many of the best rates come with very high percentage fees of two or even three per cent of the mortgage amount. Lenders have also tightened their rental cover so that many now require 120 per cent of the mortgage amount in rent. This is making it harder for landlords to get the numbers to add up.’

Like any investment, BTL comes with no guarantees, and managing a tenancy can be stressful and time consuming. But for those in it for the long term it is still worth a punt.

Property renovation
If you are a DIY enthusiast or are willing to manage a team of tradesmen, there is money to be made from property renovation or development. The most common strategy is to buy a cheap property, renovate it and sell it on at a profit.

Auction houses are full of cheap properties that need work to make them habitable. However, it is important to know what you are buying and how much work it will need. Before putting in an offer for a property, or bidding for it at auction, make sure you visit it with an appropriate tradesman or professional who can tell you the time and cost involved in repairs.

If the property is not habitable, your mortgage choices will be limited, as most lenders won’t lend on such properties. However, there are a few lenders who offer mortgages that are specifically designed for this situation. In these cases, the lender adopts a similar approach to funding a self-build property and generally the total advance would be agreed on the basis of a ‘when finished’ valuation, with the funds advanced in stages as the work progresses.

Basically, anyone undertaking major refurbishment needs access to funds to spend on the property before they can draw down additional mortgage funds.

Commercial property
Increasing numbers of investors are choosing to invest in the commercial property market, which is split into four sectors – retail, industrial (e.g. warehouses and factories), offices and leisure (e.g. hotels and leisure parks).

Investors can generally benefit from higher guaranteed income on commercial property compared with any income potential from residential rent. You generate this income through institutional leasing, which gives you a guaranteed, clear return for a fixed term.

There are certain advantages to investing in the commercial sector. Leases are generally far longer than residential rental contracts and you generally have ‘upward-only’ rent reviews every three to five years. Commercial property generally enjoys a far steadier growth in value, although there is always the risk that values can fall as well as rise. You will also need a commercial mortgage and will find that rates for these are higher than on residential deals.

Commercial property costs a lot more to buy than residential BTL property and this means that spreading risk is harder. For this reason, many investors buy into a fund or join a syndicate.

‘Commercial property should have an important role to play within an investment portfolio,’ says Andrew Wilson, head of investments at Towry Law.
‘It offers the potential for consistent long-term returns and has excellent diversification characteristics with other assets an investor is likely to hold, such as equities and fixed interest.’

Property funds
Instead of bricks and mortar, some people prefer to invest in property through a property fund. Property funds are a way of buying into the property market as part of a collective group that can invest in several properties, or buying into property companies that own, rent or develop property. However, property funds have performed badly in recent months, with some fund managers clamping down on withdrawals from certain funds.

‘Friends Provident placed a six-month deferral on withdrawal requests from its commercial property fund in December,’ says Rebecca O’Keeffe, head of investment at Interactive Investor. ‘Scottish Equitable followed, refusing to allow investors to transfer out for a whole year, while Scottish Widows and AXA have also imposed a six-month delay on withdrawals.’

Taking the long view
However, the question remains as to whether investing in property remains a good long-term investment. For example, New Star UK Property may have lost almost 20 per cent of its value in the past year, prompting many investors to cut their holdings, but over five years it has grown by 37 per cent. As with most investments, you should really invest for a minimum of five years. And while returns have been awful over the past year, there may still be a place for commercial property funds as part of a balanced investment portfolio.

‘Some property experts argue that, with the drop over the past year, buying a stake in property now is a good opportunity to produce rewards over the long term,’ says O’Keeffe. ‘Investors looking to invest in property would be wise to do so through
a tax-efficient ISA wrapper.’

Real estate investment trusts (REITs)
REITs were launched on 1 January 2007 to make it easier for people to invest in UK property. A REIT is basically a company that is listed on a regulated investment exchange, such as the London Stock Exchange, and which owns income-producing property, either commercial or residential.

The introduction of UK REITs means that small investors are now able to invest indirectly in a truly diversified property portfolio, buying low-cost and easily tradeable units, instead of having to purchase entire properties.

Investors will only be liable for tax on dividends, not on rental or capital gains earned within a REIT, as the REIT itself is exempt from corporation tax on qualifying property income and gains.

However, some financial advisers favour actual ‘bricks and mortar’ property funds rather than property shares or REITs. Towry Law’s Wilson says, ‘We do not recommend REITs for a number of reasons, including the fact that they are listed on the stock exchange, so performance is impacted by general stock market movements, and they offer limited diversification.’