Access To Property
Newly-wealthy entrepreneurs are often drawn to investment property. Is direct ownership the best way to access this asset class?
Many entrepreneurs will use newly-made wealth to buy investment property. They are typically trying to diversify their wealth away from their (high risk, concentrated) main business or away from low-yielding surplus cash into an attractive asset class that offers:
Good long-term capital growth;
A reliable stream of income; and
Security of capital.
We will take a brief look at the merits and drawbacks of different ways of meeting these goals by owning property directly and by owning property through listed shares.
Direct ownership of investment property
Direct ownership of investment property can reap rewards. Buy a well-built house or flat in an up-and-coming area, with strong rental demand and good transport links and one can expect substantial long-term returns.
However, it has drawbacks:
* “You’ll usually have to pay 3% on top of the normal SDLT rates if buying a new residential property means you’ll own more than one.” (https://www.gov.uk/stamp-duty-land-tax/residential-property-rates).
** “If you’re a higher or additional rate taxpayer you’ll pay 28% on your gains from residential property; 20% on your gains from other chargeable assets” (https://www.gov.uk/capital-gains-tax/rates).
Property through listed shares
A less common consideration for newly-wealthy entrepreneurs is to access investment property through listed shares rather than owning individual properties directly. Building a portfolio of ten or twenty listed property investment companies can provide exposure to the returns from not just a few but hundreds of properties in the UK and overseas and across all sectors of the property market.
Investors can meet the three requirements set out above (long-term capital growth, income and security) with none of the drawbacks of direct ownership.
What is more, these listed property companies are often run by experienced management teams with deep sector experience. Compared to the drawbacks of direct ownership, there are multiple benefits:
*Assuming the portfolio is professionally managed.
Listed, liquid property shares offer the potential to create bespoke portfolios that meet a specific set of parameters in terms of type of property, level of income yield, country exposure, or myriad other factors. To be able to do that with direct ownership is possible but only with portfolios running into the tens of millions of pounds.
In addition, listed vehicles allow clients to own a slice of some unique, trophy assets. Owning shares in LandSec plc, for instance, would have allowed an individual to share in the success of the Walkie-Talkie building in London, sold earlier this year for £1.3bn (1).
Of course, listed share prices fluctuate much more than directly-owned individual investment properties, as we discuss here, so the investment journey will feel more volatile. A single property investment project will almost certainly offer a much higher potential gain than a diversified portfolio of hundreds. But since we are considering the case of an entrepreneur who has just made serious wealth for the first time, we suggest diversification is more important than maximising potential returns.
So you can gain exposure to property as an asset class at low cost, at lower tax rates and with vastly more diversification through listed vehicles than through direct ownership. However, owning an investment property directly also brings non-financial benefits, including a sense of stability and tangibility. You can see it, touch it, point to it and say, “that’s mine”; hell, you can even stay in it. Shares will never deliver this emotional satisfaction.
“Walkie-Talkie skyscraper sold for £13bn to Hong Kong investor” (London Evening Standard, 27th July 2017, http://www.standard.co.uk/business/walkietalkie-skyscraper-sold-for-13bn-to-hong-kong-investor-a3597586.html).