Loan Notes
CategoriesInvestor Advice

 

Introduction

We have many investors that come to us with funds and need to decide the most suitable route to market in terms of property investment, every investor has different circumstances, resources and objectives. The investors criteria will usually give us a strong indication as to which asset class and opportunity is the most suitable fit, it’s rare that investors have an understanding of the advantages and limitations of all the different options on the market at any one time.

We spend a great deal of time every day reviewing and explaining different investment structures and thought it would be helpful to give a simple explanation as to what each sector can offer investors. We cover most major options available in the UK market with the aim of having something suited to each investor and enabling those looking for multiple investments to take a diversified approach and limit exposure.

Please see a breakdown of the major asset classes we cover below, do get in touch with any questions or if you would like to discuss what would be the best suited to your specific requirements. I’ve tried to keep the details short and sweet…

Student Property Investment

Summary: A market now worth £53bn in the UK (Savills), over the past 10 years purpose-built student accommodation (PBSA) has grown in most major UK cities. These are dedicated blocks of rooms/apartments which are let to students only.

Advantages: Fixed returns from developers, higher yields than traditional buy-to-let (BTL), significant UK demand in key cities, rising rents of about 2.5% per annum, lack of stamp duty.

Limitations: Focused on rental income rather than capital growth, cash investment – high street lenders do not lend on this asset class. The resale market is more limited.

Suitable for: Those looking for an income generating asset and intending to hold med-long term, who don’t mind purchasing a property with less liquidity than traditional BTL but higher returns.

Investment Level & Returns: Starting from approximately £55k in leading university cities, typically 8-9% NET returns.

Care Home Investment

Summary: A significant emerging market, the care home model is socially accepted in the UK, although some investors need educating to demonstrate it’s an ethical investment. Average UK wide occupancy rates of 89.4%, average UK weekly fees at £733pw (Knight Frank) – the demand for such accommodation in the UK is substantial.

Advantages: +10 year fixed rental income, higher rates at up to 10%, defined exit strategy provided by the developer, lack of stamp duty, no running costs such as service charges, ground rent, management fees. No tenant issues such as maintenance problems, deposit issues and void periods etc.

Limitations: Exit likely to come through the developers buyback strategy in most cases meaning low liquidity, also a cash-only investment.

Suitable for: Those looking for long term fixed income at attractive rates, in a truly fully managed structure and believe they may not have to exit suddenly, although can still be sold on the open market, all be it a niche one.

Investment Level & Returns: Starting from as low as £65k, returns 8-10% assured for 10 years, sometimes for the entire investment length which could be +20 years. Buybacks offered at rates of 109% to 140% from years 3 to 20.

Residential (Buy-to-Let) Investment

Summary: Traditional buy-to-let is the most mainstream, effectively city centre apartments which can be let to young professionals or students, the first property investment most people consider.

Advantages: Highly liquid in terms of the resale market, more focused on capital growth e.g. the value of the property is likely to increase faster than other asset classes, 5/6% per year in the likes of Manchester. Ability to leverage with finance and a wide tenant market with students/professionals.

Limitations: Rental yields tend to be lower, around 5/6% realistic NET returns in key cities. Exposed to void periods, late rental payments, damaged units etc which the investor will be expected to cover financially. Buyers will be relying on market conditions in terms of hoping for growth/rental increases as fixed rental rates are often only 1 or 2 years from developers. There is also the everchanging tax regulations including pricey stamp duty rates, we are also seeing a shift in the tenancy terms/law being in the favour of tenants.

Suitable for: Those looking to rapidly grow portfolios, looking to stretch funds with finance, looking for the highest return on investment and happy to rely on market conditions.

Investment Level & Returns: City centre Manchester stock starts at +£150k for off-plan property, we have £200k completed units in Central Manchester. Yields are typically 5/6% NET, the real profit will come from the property value increase which is expected to be 23% by 2023, rental prices are projected at +22% in the same timeframe (CBRE).

Secured Loan Notes

Summary: Often new to many investors, this product allows retail investors to benefit from developer grade margins. Effectively, investors loan funds to developers and will receive interest based on their investment, this is the equivalent of a 12-22% fixed return per year – with no fees. Often investors who are unfamiliar with this structure don’t believe the returns, that’s because they compare it to rental income. Every opportunity we work on the developer has an impeccable track record of paying out the returns, on time.

Advantages: Highest returns available from a hands-off investment. Flexible terms e.g. exit every 12 months with only 30 days notice, secured against assets so any defaults are covered, contractually guaranteed, potential to compound returns to achieve more lucrative profits.

Limitations: Not physical property ownership, therefore, no potential for capital growth, although the returns are attractive in their own right. Some options are reliant on specific project success/timeframes and the cash outlay can be significant.

Suitable for: Attractive to entry-level and sophisticated investors due to the lucrative structure and low starting investment. An ideal supplement to a diversified portfolio, especially alongside traditional property ownership with assets already benefiting from capital growth.

Investment Level & Returns: From £25k to +£2m. Minimum returns 12%, raising each year to 22% in year 7 – based on our most popular loan notes investment.

Summary

I appreciate the above is just a summary, for a more detailed explanation and to discuss what is best suited to your objectives, please do get in touch. We have a wide range of opportunities from across the UK with exclusive incentives, email [email protected]

As an investment agent, we don’t charge investors any fees and are unbiased in terms of recommendations. Finally, we are members of the Property Ombudsman Scheme ensuring high operational standards.

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