The Bank of England has been caught between a rock and a hard place. Tighter monetary policy has inevitably become the order of the day.
Indeed, efforts to extinguish the inflationary flames have led to six consecutive interest rate hikes, with more still to come. Of course, in practical terms, this increases the cost of borrowing, particularly relevant for property investors, which in turn leads to a tightening of net yields.
Undoubtedly, the sharp shifts in macroeconomic dynamics present mounting pressure points for investors; however, once again, the safe haven qualities of real estate appear to trump many of these market jitters. Our latest study showed that the majority of retail investors are still confident in the resilience of bricks and mortar as an asset.
Crucially, though, the appeal of traditional buy-to-let (BTL) investments are slowly being eroded away. More than three-fifths (61%) of retail investors say BTL investing has lost its gloss in recent years following many tax and regulation reforms. This trend warrants further investigation.
The elusive nature of property
Real estate has traditionally been a powerful wealth-building asset; however, the ascent of the proverbial property ladder is no easy feat for many investors. High barriers of entry have for a long time stood in the way of investors’ ambitions – namely, the limited access to opportunities, the lack of expertise and the large amounts of capital needed to even get onto the ladder in the first place.
The fact is, investing in real estate has often been too expensive for individuals to buy into and as a result, have been locked out of the property development market and its lucrative returns. Coupled with this, additional stamp duty, the removal of mortgage tax relief and tighter regulation of the rental market have all lessened the appeal of developing a BTL portfolio for many investors.
At the same time, institutional investors’ allocation into real estate assets continues to grow, spurred by property’s proven resilience against turmoil and ability to deliver secure income. Indeed, research from Knight Frank has shown institutional investment in residential assets is set to increase by 65% over the course of the coming year.
Is fractional investment challenging the status quo?
It is clear, then, that investors have been playing on an uneven field. Retail investors are turning away from typical BTL investments while institutions continue to buy up assets and developments.
Positively, digital advances are steadily levelling the playing field
The emergence of online platforms has opened the doors for investors to participate directly in institutional-grade deals on a fractional basis. To put it simply, fractional investment enables investors to disintermediate traditional asset managers and own pieces (or fractions) of high-value assets. This disintermediation represents a huge game-changer when it comes to mainstream property investing, enabling retail investors to overcome capital limitations and reap the benefits of direct property ownership while simultaneously bypassing its complexities.
This is particularly important, as the perceived complexity of property investing continues to inhibit investors’ ambitions. Shojin’s recent study found that two-fifths of investors (40%) would be inclined to invest in real estate without the complications that come with property ownership. Among those aged 18-34, the figure rose to 67%. Moreover, fractional investment enables a wider range of investment options and avenues to suit investors’ risk appetites and diversification objectives.
While this newfound disintermediation is liberating, as more platforms emerge, investors must ensure that they align their interests with regulated firms and work with trustworthy professionals that have a strong track record in the sector. Proof of their thorough due diligence and commitment to only the best deals is also crucial.
There is no denying that the macroeconomic climate will pose added challenges to investors, but thanks to advances in prop-tech, the dynamics of traditional equity ownership are being fundamentally challenged. This digitalisation is not only necessary, but unstoppable, and will bring us one step closer to democratising the investment landscape.