Interest rates in the UK have risen again today (11 May 2023), putting them at their highest level since 2008.
Policymakers at the Bank of England have raised rates from 4.25% to 4.5% today, representing a 0.25 percentage point increase. This is the 12th consecutive hike aimed at taming soaring inflation, but whilst this provides some good news for savers, rates are not rising in line with rising prices, so the value of cash savings is continuing to fall in real terms.
Today’s news also presents a challenge for landlords employing leverage to buy and hold property. As a result of increasing rates, combined with recent controversial tax changes, a recently carried out survey by property tax experts Cornerstone suggests that just 20% of existing landlords say their investment has been profitable in 2023.
According to Moneyfacts last month, the average two-year fixed buy-to-let mortgage with a 40% deposit had a rate of 5.2%. This means that even before today’s announcement buy-to-let investors were paying more than double the 2.5% they were last year and even more compared to the 2021 average of 2.12 %.
So where does this leave buy-to-let investors today? Whilst some may be willing to ride out the storm, the National Association of Property Buyers (NAPB) has now suggested that previous estimations of half a million landlords choosing to sell up may be a massive under-estimate. For some, buying property outright is a possibility, but even for those with the deepest pockets, drastically increasing initial outlay impacts the ability to build a diversified portfolio.
Rising rates not only affect investors of course, but also aspiring homeowners, putting their dreams of owning their own home further out of reach. But fewer private landlords in the UK is unlikely to help them either. A reduction in investment at the scale suggested previously could quickly result in a reduction of available rental properties leading to increased competition and ultimately higher prices for tenants everywhere.
Removing private landlords from the market could leave tenants at the mercy of larger institutional investors, which could result in reduced tenant rights and less personal attention to individual tenant needs. Renters may face stricter rental policies, limited lease flexibility, and a lack of personalised landlord-tenant relationships.
A solution for new and existing landlords is fractional ownership. With fractional ownership investors can buy and hold fractions (shares) in an SPV that owns individual properties, providing a relative share of net rental yield and any long-term capital appreciation generated. Because properties are 100% owned by investors with no leverage, returns are largely immune from interest rate rises.
Furthermore, through buying fractions (typically 0.2% ownership), existing investors have an increased ability to diversify their portfolio (compared to traditional property investment) and lower financial barriers making investing in property more accessible for a new generation of aspiring buy-to-let investors.
Today’s rise in interest rates poses real challenges, not only for investors, but aspiring homeowners and renters alike. The market desperately needs innovation to allow greater democratisation and accessibility at both ends of the market. Unleveraged fractional ownership provides a solution to these problems, insulating investors from future interest rate rises, facilitating investment across the country through diversification, encouraging high standards through competition, and allowing more people to invest in property for the future.
This article is not a financial promotion and is not intended as an offer or solicitation to enter into investment activity. Any opinions expressed are the opinions of Cahootz Group Limited at the date of publication and do not constitute financial, investment, legal, tax or other advice. Any investment carries risks, and you should consider these carefully before making any investment decisions.