Sustainable Residential Investing

How to Make Profits with Positive Impacts from UK Property

Anna Harper

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000590449
• Edition: 1
• Topic: Business
• Subtopic: Real Estate
• Index: Business

For investors from across the world, UK residential property is seen as one of the best investments available. This is for good reason. It has a track record of delivering strong, stable returns in a way that is relatively easy to understand and implement. The trouble is, the market has changed. The investors of the future value sustainability more than ever before. There is unprecedented and growing demand for Environmental Social and Governance (ESG) investing, now worth $30 trillion in Assets Under Management each year, around a quarter of all professionally managed assets.

The traditional goal of profit maximisation is being replaced. Investments must increasingly be profitable as well as sustainable: economically resilient with positive ESG metrics. Yet the UK residential property market – worth over £7.5 trillion – is lagging behind. There is very little clear, easily usable guidance for those responsible for a huge proportion of the market: private investors. The positive impacts of sustainable property investing – for profit-motivated investors, people and the planet – could be huge. The financial, environmental and social costs of getting it wrong could be catastrophic.

To get this right and to avoid the risks of getting it wrong, it is vital to understand:

• What sustainable residential property investing is

• What needs to change and

• How, on a practical level, you can invest in a way that is both profitable and sustainable.

This book draws on expertise from within and beyond real estate, provides a simple framework for updating your approach. It highlights common mistakes and shares advice so that you can avoid them. Ultimately, it's about answering the question of the decade: 'How can I invest profitably with positive impacts?'

Part 1
Understanding sustainable residential property investing

DOI: 10.1201/9781003196983-2

In this section, I’ll explain what residential property investing is and why it’s so popular. I’ll summarise key aspects of the current market context. Finally, I’ll explain what sustainable residential property investing is.

1 What is residential property investing, and how does it solve investors’ problems?

DOI: 10.1201/9781003196983-3

What you will learn

• What residential property investing really is and what it is not
• Three common problems potential investors face in the current environment
• How property has, for many years, solved three major problems potential investors face

What is residential property investment?

So that we are all on the same page, a definition of investing is provided as follows:

putting (money) into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit.¹

Residential property investing is simply putting money into real estate, with the goal of getting more money out in the future.

This can be through the direct purchase, ownership, management, rental and/or sale of land and buildings. It can also be indirect. For example, it might be via land banking schemes, property company shares, real estate investment trusts (REITs) or other investment trusts.²

What is residential property investing not?

Investing in property is not the same as home ownership

Many UK property investors have become ‘accidental landlords’: moving house and not selling the property they lived in or moving in with a partner and doing the same. Buying a property and living in it, like buying a car which you drive, is ‘consumption’ rather than ‘investment’. Why? Unless you are renting it out profitably or can guarantee that the benefits of capital growth will outweigh the costs of ownership, it costs money to hold on to it. It is therefore a liability rather than being a profit-making asset that produces income or is certain to increase in value.³

Investing in property is not about speculating, making a quick trade or developing land to sell on

Some developers will hold on to assets for the long term. Some investors do seek to add value to their assets by building on their land or developing buildings. Generally, though, development projects and property ‘flips’ are seen as a trade rather than an investment. This is the case both in theory and in practice – for example, through accounting practices.

Property investments are not just a financial product

It can be difficult to trace the destination or impact of your investment when it comes to complex and impersonal financial derivatives, stock market investments or commodities. For this reason, some controversy surrounds many investments claiming ESG credentials. By contrast, property investors provide housing for real people, their tenants, who exchange rent for a home. Direct property investment and its impact are real.

In the current market, what problems do potential investors face?

Many potential investors worry about three common problems.

1 Losing money

If you’ve ever lost or come close to losing money, then you’ll know you need a way to protect your hard-earned wealth. You don’t want to have to worry about how you are going to maintain your lifestyle into old age or how you are going to provide for your children.

Losing money can be sudden. It can also creep up on you over time. For example, in the current low-interest-rate environment, by not investing, your money loses value to inflation.

It’s a risk every investor faces that’s worth trying to avoid. As Warren Buffet famously said,

Rule number one: never lose money. Rule number two: never forget rule number one.

2 Feeling unrewarded

You probably hate the idea of standing still and not making progress. You probably hate knowing that you’re making less than you think you should be making or less than you know friends or family members are making.

You want to grow your wealth, and you may also want to have a tangible impact on the world, something you can feel proud of. There’s a psychological and a social element to feeling rewarded. It isn’t just about money, and it isn’t always easy to achieve.

3 Lack of confidence

There are two types of confidence that cause issues for investors. Firstly, if you haven’t invested, then you have to rely on savings or earnings to cover your current and future costs. This makes it difficult to feel secure and confident in your financial future.

Secondly, if you have invested or are investing, you may not feel confident in the results. Even professionals who dedicate all of their time and energy to investing don’t expect to make money all of the time. It’s simply not that easy.

Many potential investors struggle to work out the right approach for them, to know what a good deal looks like, or to know how to manage their portfolio. They fear making mistakes that could lose them valuable time, money and sleep through investing at the wrong time, in the wrong locations, in the wrong assets, or in the wrong way.

The pain

All in all, many investors worry about missing out on returns they could, and feel they should, be making.

How does residential property solve investors’ problems?

For investors from across the world, UK residential property is seen as one of the best investments available.

There is an emotional pull and cultural attraction towards bricks and mortar. It’s easier for most people to understand because most people have some experience living in a home. It feels like a safe place to store wealth because it offers a unique combination of tangibility, trust and a track record of strong, stable returns.

Figure 1.1 At the intersection of investors’ three most common problems (losing money, feeling unrewarded and not being confident) lies the core issue: potential investors hate the idea of missing out.

In the UK, we are culturally obsessed with property ownership. This is reflected and exaggerated by the media, including popular television shows and regular articles in major news publications. As a result, individuals from all walks of life feel they can and should invest in property.

Owning property has come to be a signifier and determinant of success. For example, the Sunday Times Rich List is dominated by people who have made their money in their industry and choose to invest it in property. It is also the single largest asset class ultra-high net worths invest in, at 27%⁴ of their holdings.

Owning and improving real assets and providing homes for people can be rewarding – a source of pride. It’s a popular way to meet investors’ goals of diversifying their investments, protecting wealth and earning extra profits. This helps to explain why, for so many years, it’s been seen as a great way to solve the three major problems investors face.

Let’s dig into each of these.

Protecting wealth

Residential property is seen as safe and secure: you can use it to protect your wealth. It feels, and historically has been shown to be, less volatile and risky. It’s a time-tested way to protect wealth, meaning you may be less likely to lose money (although past performance is not a guide to future success).

It can balance the volatility of other investments. For example, many of the investors I’ve worked with also invest in the stock market. Since the turn of the century, the FTSE 100 has suffered seven times more crashes than the housing market. The largest peak to trough in house prices was around 22%, whereas the FTSE 100 has seen seven similar-sized sell-offs (2000, 2001, 2007, 2008, 2011, 2016, 2020). Volatility like this puts you in a precarious position if you need to sell at a bad time in the market and means your net worth can fluctuate dramatically over time.

By contrast, residential property tends to hold its value because of the fundamentals of demand and supply, which I’ll talk about more in the next chapter.

Feeling rewarded – financially and socially

Property is also seen as a great way to grow your wealth. It delivers attractive financial returns in the form of cash flow and growth. It’s also a source of pride: it feels great to have the kind of tangible and social impacts that come with providing and improving people’s homes, whether you want to build a legacy for your children, impress friends or simply feel good about where you are putting your money.

So, it provides obvious financial and social benefits in a way that is tangible rather than leaving you feeling unrewarded.

Confidence

The strong track record of returns and the relative stability that residential property offers give investors confidence in their financial future.

As for feeling confident in your investments, unlike with, say, technology investments in the stock market, there’s no pressure to predict the next hot trend. Everybody needs a place to live, and investors generally have some experience living in a property. For this reason, it’s easy to feel confident in the investment case for residential property overall.

Areas can change over time, but demand doesn’t tend to plummet overnight, ruining the value of your investment. So, provided you buy decent housing in locations people want to live, ongoing, strong demand for housing can help you to feel confident in your financial future and that you’re not making a huge mistake.

It’s worth mentioning lending at this point. There are very few assets that banks feel confident lending so readily on. Their willingness to lend, and to do so at a low cost to borrowers, illustrates how confident they are in the stability and returns that residential property offers. The added advantage of widely available and cheap finance for investors is that this makes it easier to grow a portfolio quickly for investors who have the right advice and access to deals.

The prize

Ultimately, investors want to protect their wealth, to feel rewarded and to invest in a way that they feel confident in, both in terms of understanding and implementation. They want to make the most of opportunities in the current market.

Figure 1.2 For many years, residential property investing has solved investors’ three most common problems of losing money, feeling unrewarded and not feeling confident. It has done this by providing a way to protect wealth and feel rewarded that you can feel confident in.

So, property is partly an emotional choice. It’s also a logical and time-tested one. It solves the three major p...