Budget 2018: What did Spreadsheet Phil do for your investments?
After waiting patiently* for more than an hour for any news on changes to our investments, the...
The TM home investor fund is the only funds available to UK investors, which invests directly in residential property. It holds over 200 properties across mainland UK.
Manager Alan Collett has worked in residential property all his life. He is also non-executive Chair of the Hyde Housing Association, which owns and manages 50,000 properties and has, in the past, been President of the Royal Institution of Chartered Surveyors.
We caught up with him to find out more about the fund, its process and the outlook for residential property in 2019.
Our philosophy is to buy and let mainstream properties across mainland UK, in areas with good private sector employment, from which we can draw our tenants. We do not invest in prime, affordable or social housing, we also avoid student property or care homes.
Investment in good quality housing, in which people can make their homes, is widely considered to have a positive social impact, and our typical properties are 2-3 bedroom homes, terraced, semi-detached or flats on low rise buildings. We buy exclusively new or nearly-new homes, which will offer our tenants comfortable living and low energy bills.
The fund takes no development risk and there is no gearing or borrowing on our purchases. We try to adopt a ‘buy and hold’ approach to reduce transaction costs.
First, thorough research of the UK residential property market is undertaken. From this research we identify which regions and types of properties our fund should focus on or avoid. Some aspects we focus on are local infrastructure: close proximity to excellent schooling, public transport, green areas and leisure facilities and supply of new homes, for example.
We then source properties that fit these views. First, we narrow down specific towns in the preferred region, before engaging locally with housebuilders.
Each acquisition is carefully assessed and valued against our buying criteria, such as the potential for rental value growth. Often we buy clusters of new homes, in order to keep maintenance and valuation costs lower. Doing this also means we are in a better position to negotiate sizeable discounts from housebuilders. The benefit of such discounts is reflected in the Net Asset Value of the fund and, as such, our investors directly.
The circumstances for most tenants lead them to prefer shorter tenancies – often one year initially, although our average period of occupation is around two years. Rents are reviewed after the first year, and increases are generally close to the level of inflation at the time.
Our target is for “standing stock” – that our houses are always rented out. At any point in time some properties are either being acquired or up for sale and typically these are vacant, but our occupancy rate is currently 94%.
We conduct thorough checks on new tenants to ensure that our good quality homes are let to reliable and caring tenants. Ultimately, this creates a win-win situation. As an example, I am really pleased that we are in the process of selling one of our properties to a long-term tenant who had expressed a desire to become a home-owner.
Our target is to hold 10-15% of cash to manage redemptions.
In extreme circumstances, this might not be sufficient to meet a huge spike in redemptions for a period of time. Having said that, our fund has been able to manage redemptions throughout the five years since inception, including the time after the 2016 Brexit referendum, when a number of commercial property funds had to suspend trading temporarily.
It is also worth adding that residential property is much more liquid than commercial property – in other words easier to buy and sell; typically, there are 10 times more transactions in residential property than in commercial, and a property in our fund has an average value of £250,000, versus an average of over £30m in UK commercial property funds.
As and when market conditions change, residential property acts differently to other mainstream asset classes such as equities, bonds and commercial property. This is because house price growth is influenced by different factors than those driving returns of these other mainstream asset classes. This is a particularly useful attribute when things turn sour: residential property has proven resilience in downturns.
We have already seen a slowdown of capital growth over the past 12-24 months, starting in Central London and then generally in the South East. However, this hasn’t fully spread across the UK, and we continue to see house price growth in much of the Midlands and parts of Northern England.
For 2019, looking at a number of independent house price forecasts monitored by the Treasury, the forecasts range from 0.7% to 3.3%*. So, despite some of the headlines, the consensus for 2019 is positive house price growth.
On top of that, we always have the residential income, which is resilient across cycles – people need a home in which to live, and rents have tended to move in line with wage growth, which has been accelerating recently.
*Source: 2019 UK residential property market outlook, Hearthstone Investments