Business

IS GLOBAL STABILITY THE PRECURSOR TO INFLATION? AND WHAT WILL THAT MEAN FOR YOUR PROPERTY INVESTMENT DECISIONS?

By March 22, 2018 No Comments

The world, if you discount plastic pollution, the possible overthrow of humans by robots, and rogue politicians poisoning dissenters on foreign soil is, it seems, rocking slowly back to an even keel—at least from an economics point of view. All is well. Prosperity is the new byword.

Slight caveat to that is that it does, of course, depend on which side of the prosperity line you happen to be sitting. For while the likes of Persimmon Boss, Jeff Fairburn, anticipate a personal shareholder payout of close to £100million—an amount that would comfortably buy 416 average priced domestic properties in the UK—home ownership figures among adults in their 20s and 30s look undeniably dire.

Still, many of those aforementioned 20-30 year old millennials have the lifeline of the bank of mum and dad. And they have the government onside, something that became abundantly clear when Hammond, in his autumn budget, went far beyond rhetoric, handing out Stamp Duty tax relief on properties of up to £300,000 for first time buyers. And that’s great news…if you are a first time buyer. But if you’re an existing or prospective landlord looking for new opportunities, it’s the worst news of all.

The fact is that pretty soon landlords issued loans on rental properties between 2014 and 2016 won’t, by 2020, be able to service them through their investment generated income. They’ll have to top them up from other income, hoping that capital gains will bear out when they sell, whenever that might be. As any seasoned investor will tell you, it takes a strong stomach to keep on topping up an ailing investment that you once optimistically envisaged providing a good and growing yield far into the future. After five to ten years of doing that…well, even the strongest stomachs can get ulcers.

A recent report by S&P Global Ratings suggests that well over half of buy-to-let loans taken out between during that time will, as tax relief gets phased out, become loss making. And according to the National Landlords Association, the government’s changes to tax are already starting to bite, with a fifth of existing landlords thinking about selling up.

Looking to the wider markets, volatility is back in force, which will perhaps exacerbate landlords’ difficult situation. Vitally, politics and business finance are starting to coil around one another again: think Carillion; think Datagate and the Facebook Cambridge Analytica scandal with its tech stock contagion; think Trump with his protectionist rhetoric, and import tariff threats. These things are important. Why? Because, as history shows us time and again, when politics and finance start sparring in the same ring, ringside seat prices go up.

On this metaphoric allusion to the subject of inflation, it’s worth noting that even though markets in the UK have pulled back from the point at which Mark Carney is forced to ink a letter to the chancellor, the figure still sits at 0.7% above the accepted inflation target of 2%. And with wages growing by 2.6% in the final quarter of last year, there are clear signs that consumer spending capacity is moving into positive territory for the first time in a decade—another factor pushing the topic of interest rate rises to the forefront of central bank agendas. The big question them is: is inflation a good thing? Well that really depends on your point of view.

When you think that the average UK house price back in 1997 was just £73,000, and today it’s  £240,000, that’s good, right? Especially if you own property. For the majority of people who bought a house back when Blair and D:Ream were jumping about onstage together, singing ‘things can only get better’, their properties have earned more money than they have.

No wonder, then, that people piled into bricks and mortar, either to flip them or fortify their pension pots. Unfortunately, for those who continue to use the time-tested methods that worked so very well in the past for so many, the sector is now rigged with dynamite, the fuse of which is fast burning down. No longer is it a case of, ‘how do I get in?’, but ‘how should I get out?’

It’s a large part of the reason that I, once a big advocate of buy-to-let, started moving away from it, and began investing in hotels. I was attracted to the greater number of revenue streams available in hotels, the minimum 8% returns on sensible investments, and the simple fact that the hotel sector doesn’t suffer from the same level of amateur heat as buy-to-let. From the outset, hotels are business investments, not purely pensions alternatives. When it comes to buy-to-let, because of the high price of purchase today, the tax disincentives, and the current political stance that views landlords as social pariahs, I’ve all but turned my back on it. I still own tenanted property, but my investment head told me the time had come to look elsewhere.

Unless you’re an institutional investor with a limited company, domestic property investment has become so cost ineffective, and so riven with problems and investor hardships, it’s barely worth looking at. Sure, capital growth is always a good reason to hold onto property investments, but the lack of tax relief on capital gains enjoyed by other businesses, along with new licensing laws and the growing tax pains that chew out profits, make buy-to-let a shaky gamble.

Good hotel investments on the other hand are a carefully calculated risk. For Shepherd Cox they’re going from strength to strength, with new acquisitions made on behalf of the company and its many investor partners, on a monthly basis. What I’ve discovered over the last few years is that, when approached pragmatically hotels promise excellent returns with far fewer headaches. In addition to having several good revenue streams, they frequently make money from day one, they can be folded up into SIPPs, and they don’t squawk when the interest rate goes up. Unlike rent, which is logically capped by the  tolerance of tenant income, they have more flexibility in simply reflecting in day-to-day pricing what is happening in the wider economy.

This, of course, is a quick and simplistic overview of how hotel investment works, but if you would like to find out more, please get in touch with us at Shepherd Cox and we’ll run through everything in detail.