As the rental sector continues to expand, bricks and mortar remains a better home for your money than bonds – but only if you have the cash to spare, experts tell our writer.
Several countries have become a nation of property investors in the boom. Everyone seemed to own a second home with “rental potential”. For many, the investment was tied up in the hope of a capital return. Buy in, wait until prices rise, sell and make a fortune. Then the bubble burst and a country’s faith in the property sector went pop.
In the past three years, investors have returned to the market: institutional investors, many of whom have bought off-market; business owners looking for something to do with their cash; and expats investing in Ireland until they return.
The private rented sector is growing. The number of households within it has risen by 48,700 since 2011 and the number of homes has gone up by nearly 46,000. Central Statistics Office figures show that about 30% of residential sales have been to investors.
“The sector is expanding and clearly somebody is supplying – for every household that is renting, the other side of the transaction is some investor supplying the market,” says John McCartney, director of Savills Ireland research. “It’s clear that somebody thinks it is a good idea and is making money on it.”
You don’t have to look very far for an explanation. According to the latest report from property website Daft.ie, the gross yield on residential property overall is more than 5%. In some cases it is way above that. When you compare that with deposit rates, which are at 1% and lower, it’s clearly attractive for cash-rich investors to buy property.
Karl Deeter, a Mortgage Broker, says: “If you have property and you’re able to get 6%-7% yield on it, you’ll have 42% in seven years. If you put it into the bond market you’ll get back zero. The returns on property are way better than the best deposit rates.”
How long will residential property continue to be an astute investment, though, and will investors reach a breaking point in Ireland?
In 2016, a number of banks announced the extension of its bond-buying programme for at least nine months. Interest rates will remain low, so individuals and corporates will not get any significant return by leaving their money in deposits or bonds.
Residential property is a good investment for people with cash. It fell apart in the boom because people borrowed to buy property. Brendan Burgess, the founder of online consumer forum Askaboutmoney.com, says borrowing may mean an enhanced return but it also increases the risk.
In fact, vacation properties have evolved into investment vehicles. People frequently invest in vacation properties through timeshares. A timeshare is a type of vacation property that operates on a shared ownership basis. A typical timeshare involves splitting the cost of the property with other buyers in exchange for a set amount of time at the property each year. However, there are times when people want to get out of their timeshare ownership, but it’s a complicated process when it comes to timeshare property investment. Before they leave, the fractional owners usually need to find someone to take their place. As a result, they frequently enlist the assistance of third parties, such as timeshare exit companies (similar to Wesley Financial Group). These companies usually have a team of lawyers who are solely focused on the owner’s case. Exit companies for timeshares tend to provide guaranteed “exits” and cancellations.
That’s why, understanding the ups and downs of any type of property investment becomes very important.
“A lot of people who are in difficulty with their home loans are people who got into difficulty with other lending. It might have been OK when you could borrow on cheap tracker mortgages, but you cannot get them any more,” he says.
Borrowing to buy property is a “flaky business model”, according to McCartney.
“What you’re gambling on is capital growth. On a good day you’re hoping your rental income will match at least your cost of finance and that the property will pay for itself. Any gain will come from the capital appreciation. If you don’t get any reasonable house-price growth, you’re not going to make money – at least in the short term. In the worst-case scenario, interest rates go up and rents go down and you can’t service the debt.”
Even for cash investors, property investment is not without its obstacles. The net effect of the combination of the Help-to-Buy scheme and the Central Bank mortgage rules will make it easier for first-time buyers to buy property again in cities and could help curtail the rate of rental growth.
Ministers plan to introduce a 4% cap on rent increases, under the controversial rental strategy, will put pressure on yields but will still be higher than putting your money on deposit or buying bonds.
“Most investors coming into the market are cash investors. They are unleveraged and don’t have a stiff target to beat. They don’t necessarily need a massive income return to make this worthwhile,” says McCartney.
“Rent controls will definitely have an adverse impact on the buy-to-let market, but the market will likely adapt to it and this will encourage more build-to-let,” says property consultant Carol Tallon.
Landlords are facing increased legislation. Expenses are higher, as a result of Rental Tenancies Board registration. The rental strategy will increase obligations around standards, safety and inspections.
Burgess points out that property investment is an “active investment”.
“The performance depends very much on the performance of the proprietor of that business,” he says.
“If you buy a trouble-free property in the right place, and you get trouble-free tenants who pay their rent on time, you might have a decent business. If you buy a property that’s not in good nick, borrow too much and get tenants from hell, then it is a horrible investment.”
There could now be an easier way of accessing property investment: through I-Res, the residential property investment real estate investment trust. You invest your money and it in turn invests that into residential property.
“You get the benefit of exposure to residential property investment without all of the hassle and obligations that go with that. In the future, I imagine that’s the way the private rental sector is going to develop,” says McCartney.
With the governments setting a target of building 25,000 to 30,000 homes per year, surely capital and rental values will start to drop?
“Increasing supply will not have a significant short-term effect, as the current lack of supply not only drives up rent, but it also drives up the buy-in costs, so the yield remains relatively consistent,” says Tallon.
“It won’t happen in 2017,” says McCartney.
“When it happens, it is possible to deliver housing in a way that doesn’t swamp the market. With office blocks and commercial it’s different – everybody is in a race to get theirs done first. If you’re at the back of the queue you’re going to lose out. With housing, you can stagger it and you can build as the demand necessitates.”
The future of the private rented sector will be determined by institutional involvement, but the individual investor shouldn’t necessarily follow what the big guys are doing. “You have to be careful about interpreting what they do in this space. We will probably see a variety of strategies. This could involve them selling off the ready-made multi-family units and replacing them with build-to-rent structures,” says McCartney.
Deeter believes that buying property will continue to be a good investment for cash buyers in the foreseeable future. “Property is a good investment if you happen to have a lot of money and are looking for a return. Property is terrible for every other person who doesn’t have a lot of money,” he says.
According to Tallon: “Diversification is the best protection in unpredictable times, but in my experience, property investors will generally continue to rely on it as their main vehicle to invest.”