Statistics consistently show that not just corporates, but individual investors too, are increasingly drawn to structured, portfolio investments – and that the current market provides some excellent opportunities for entry into this market.
This has been brought about primarily by two legislative changes: permitted development rights (PDR) and changes to the structure of personal pensions.
Firstly, permitted development rights (PDR) legislation enables building owners to convert from commercial (typically office, hotel or retail) to residential use. Full planning permission is required if a property owner wishes to make structural changes but the relatively recent option of PDR can provide permission for change of use without the need of a full planning application.
Secondly, we’re used to seeing major pension funds invest in portfolio property, specifically the thriving Build to Rent sector, for which the investor (pension-holder) sees an excellent return on their portfolio summary. But for the individual investor or small company, the use of private pension funds – Small Self-Administered Schemes (SSASs) or Self Invested Personal Pensions (SIPPs) – can be a highly effective way of profiting from property.
Many individuals or small companies purchase a property portfolio using funds in a SSAS or SIPP, then manage that investment through as a private company but with the profits then fed back into the pension fund. This creates a considerable tax saving because pensions are currently exempt from both Capital Gains Tax and Inheritance Tax.
If, as anticipated, the Chancellor raises Capital Gains Tax and Inheritance Tax in the Budget on 30 October, both traded investments and probates will be hit hard. But a property investment via a SIPP or a SASS may be a way to look at investment purchases differently, as these should remain immune from tax hikes.
It’s an option, in addition to being utilised by private individuals, can also be used by companies of any size, with the individual directors paying dividends into their pension and managing profits independently from that point onwards).
LRG doesn’t provide tax advice – I’m simply reporting what I’ve seen functioning well for clients – but we certainly see the potential for growth in this sector.
It’s following this increased interest that our Portfolio Sales team has expanded to enable both individual and corporate investors to buy and sell smoothly and efficiently to a mature and active investor market – a considerable investment in cloud-based super-secure data rooms which allow clients to buy and sell large scale assets efficiently.
Considering the changing circumstances, it’s no surprise that at the start of the summer Paragon Bank reported that the average gross rental yield reported by landlords reached the highest level since the second quarter of 2018: after increasing for the third successive quarter, average gross rental yields hit 6.1% in Q1 2024. Similarly, the Landlord Guild predicted an increase in corporate loans for property prices, stating, ‘Property investment businesses are expected to take off during the next 12 months in 2024’.
Prior to the pandemic, institutional investment in UK real estate was focused on commercial property. But the world has changed, and residential property is demonstrably the more robust asset class, with yields consistently out-stripping those of the commercial sector. With a continuation of the freedoms about by change of use, substantial capacity for growth in the BTR market and the government’s ambitious housebuilding programme, the opportunities for residential investment look set to continue.
- Andy Jones is Group Director of Corporate & BTR at Leaders Romans Group *