The UK is in a state of economic turmoil. Inflation, a bygone foe, has returned with a shocking vengeance. The pound has fallen to a record low against the dollar as markets reacted to the UK’s biggest tax cuts in 50 years. Meanwhile, interest rates are continuing their steep climb, reaching levels unseen since the financial crisis.
Such is the complexity of the current macroeconomic backdrop that it has precipitated interventions from the most revered economic institutions both at home and abroad: the UK’s independent central bank (the Bank of England) urgently announced a £65bn gilt-buying operation due to the “material risk to UK financial stability” and the International Monetary Fund politely told the UK government to have an urgent rethink.
What does all this mean for property investors?
Most obviously, the cost of borrowing is set to increase significantly. This will be felt across the whole property sector, from homeowners experiencing significant mortgage increases to seasoned investors seeking finance. Investors will be looking – no, needing – a greater return on investments with less risk in order to justify costly borrowing.
From an international perspective, perhaps the weakened pound will attract some overseas investment. However, traditional property investment opportunities overseas could present added challenges for domestic investors in light of the currency’s depreciation.
These unforgiving conditions will make even the boldest investor stop and pause, yet the familiar spectre of a financial crisis has reared its head before. Investors have had to respond to changing macroeconomic conditions since the dawn of time and one asset has proven resilient in the face of turmoil – real estate.
Its lofty status can be attributed to its remarkable ability to retain value, even in periods of high inflation. When other investment options such as stocks have crumbled under economic pressure, real estate has continued to appreciate.
Shojin’s latest research shows that this confidence has held, with the majority of investors considering real estate as an attractive asset class. However, the investment landscape is rapidly evolving. The study shone a light on the decreasing appeal of buy-to-let (BTL) investments, according to 61% of investors; perhaps unsurprising given the many changes to tax and regulation in recent years. Although, more innovatively, there are structural changes widening the participation of a broader group of investors across real estate.
Fractional investment – the great equaliser
Despite its great appeal as a secure wealth-building asset, real estate investment has remained elusive to the average investor due to its notoriously high barriers to entry. Most notably, this includes the enormous buy-in price required, which has restricted investor participation for a long time. However, just as limiting are the required expertise and market knowledge, as well as the changing regulations and tax burdens that have diminished the appeal of traditional BTL property investments.
Fortunately, the emergence of digital platforms is breaking down these barriers, unlocking institutional-grade deals to a whole new class of investors. This has been made possible by fractional investment platforms.
Fractional investment enables investors to purchase a proportion or stake in high-value real estate assets. By gaining direct access to lucrative property deals on a fractional basis, investors are able to better overcome capital limitations and benefit from lucrative returns derived from direct property ownership.
To put it simply, investors with smaller budgets can now pursue flexible investment opportunities in lucrative development projects across the entire property spectrum, reducing the entry barrier to these opportunities from hundreds of thousands to thousands of pounds. It is impossible to overstate this extraordinary change in accessibility.
This is not the only way fractional investment is challenging the dynamics of traditional equity ownership, however. The infamous complexities of property investment have dispelled investors – Shojin’s recent study revealed that 40% of investors would be more inclined to invest in real estate were it not for the complications that accompany property ownership. This sentiment was particularly strong among those aged 18–34, rising to 67%. Fractional investment platforms are streamlining real estate investment by disintermediating traditional asset managers, removing capital limitations and enabling retail investors to bypass traditional hurdles.
Naturally, this newfound disintermediation must go alongside rigorous due diligence. As the number of fractional investment platforms grows, investors must make sure that they align their interests with Financial Conduct Authority-regulated players with a solid track record of experience in the sector.
While the pressures of the current economy compound the need to proceed cautiously, investors stand to gain by being alert to the advances in proptech that are steadily levelling the real estate playing field. In doing so, they will be better placed to broaden their investment horizons and harness the benefits of a more democratic investment landscape.