Is Property Still A Good Investment?

For a long time, UK residential property was a sound investment. With house prices steadily rising, and rental income typically covering mortgage expenses, it was relatively easy to generate a profit.

However, in the last few years, we’ve seen a dramatic shift in market dynamics. As a result of higher interest rates, and new taxes and regulations aimed at residential property investors, the asset class is not as profitable as it once was.

Is property still a good investment today? Let’s explore its viability in the current economic climate.

The challenges facing property investors today

There’s no doubt that property investing has become more complex than it was a decade or so ago. For a start, interest rates have risen by hundreds of basis points, pushing mortgage rates up significantly. This has had a negative impact on investor returns. In late 2023, for example, UK property prices declined at the fastest pace in over a decade.

Secondly, taxes on property investing have increased. Today, buy-to-let landlords have to pay higher Stamp Duty costs when purchasing a property as well as Income Tax on their entire rental income. They also need to pay Capital Gains Tax (CGT), at higher rates than for other assets, when selling a property (the annual CGT allowance has just been reduced to £3,000) and Inheritance Tax (IHT) if they pass away before selling.

On top of all this, the costs of managing property have risen sharply. Today, investors are looking at extra costs as a result of new regulations in relation to Energy Performance Certificates (EPCs) and regular safety checks. Additionally, they’re looking at higher repair and maintenance costs due to inflation.

Now, this change in the landscape doesn’t necessarily mean that property should be ignored by investors. After all, there are many attractions of the asset class, including regular income, protection against inflation, and a low correlation with stocks and bonds. However, given the market shift, investors may want to consider alternative forms of property. With residential property profits being squeezed, there may be better options especially if property forms part of your retirement investment strategy.

An alternative form of property to consider

One form of property that could be worth considering in the current environment is commercial property. This includes office buildings, shopping centres, hotels, warehouses, hospitals, data centres, and other types of property that are used for business activities.

Investing in commercial property has a number of advantages over investing in residential property, including:

Higher yields – Commercial property yields are often higher than residential property yields.
Long-term leases – Leases are typically between three and 10 years.
Income growth – Leases often have built-in rent increases.
Ease of investment – Commercial property can be bought via funds.
Low transaction costs – With commercial property, you don’t have to fork out thousands in Stamp Duty.
Lack of maintenance – Maintenance is the responsibility of the tenants.
The ability to diversify – You can diversify capital across different areas of the commercial property market easily.
Exposure to economic trends – Commercial property can provide exposure to powerful, long-term economic trends.
Tax-efficiency – Investments can be made within an ISA or SIPP.

It’s this last point, tax-efficiency, that really sets commercial property investments apart from residential property investments. One of the biggest attractions of commercial property is that it can be purchased inside a tax-efficient account. This has major implications from a taxation perspective. Invest in property funds within an ISA, for example, and you can potentially generate tax-free gains and income. Invest within a SIPP, and you can potentially generate tax-free gains and income, and also avoid IHT.

It’s worth pointing out that commercial property has its own risks. Like residential property, the asset class can experience weakness in a higher-rate environment. Meanwhile, a slowdown in the economy can have a negative impact on tenant demand and investor yields. Liquidity is another risk to consider. In the past, there have been times (e.g. the Global Financial Crisis of 2008/2009 and the 2016 Brexit referendum) where investors in open-ended commercial property funds have been faced with liquidity issues. If you are unsure as to whether commercial property is a good investment for your portfolio, it’s sensible to speak to a financial adviser.

Other asset classes worth considering

Given the issues facing the property market today, investors may also want to consider avoiding the asset class altogether. After all, there are plenty of other asset classes that can help you achieve your financial goals. Those seeking long-term growth may want to consider investments in technology companies, emerging market equities, or smaller companies. Alternatively, those seeking income may want to consider dividend-paying stocks, government bonds, or high-yield fixed-income securities. Of course, investors don’t have to choose one area of the market to invest in. With the help of an expert, they can build a diversified portfolio that provides exposure to a wide range of assets.