Property opportunities abroad

I have always believed in property as an investment and I own two properties in Malta which I rent out and receive a regular income from. Prices have however gone up too much now and, although I want to invest in more property, I would like to know what my options are in buying in the UK. I would however prefer not to commit a large amount of capital without understanding the UK market better.

No-one can question the capital appreciation received from residential property in Malta. Many however agree, as you say, that prices in certain developments/areas seem to have now got ahead of themselves and there is certainly now a growing concern of highly inflated prices on certain properties, especially at the higher end of the market.

Like any investment decision, you must be wary of 'buying in at the peak'. Whether we have reached that stage is debatable and is not for me to make any professional comment thereon.

The picture in the UK has similarities to Malta with house inflation being in excess of 10% for quite a number of years now. The difference there though is that such inflation can have a direct negative impact on the economy if prices are seen to be escalating out of control.

This is because there are a much higher percentage of borrowers in the UK than in Malta. It is common for first-time buyers to enter the UK property market in their early 20s, therefore taking on a large debt. As house prices increase, buyers naturally take on a higher liability, ignoring the effects of interest rates.

Over the past six months we have seen interest rates in the UK increase substantially to their present level of 4.75%. The effect of this is to increase the monthly expenditure on variable rate home loans.

There is clear evidence now that the interest rate increases are having an effect. The number of new home loan approvals for house purchases saw its biggest monthly fall in more than ten years in July in what economists say could be the start of a sustained property market slowdown.

According to the Bank of England, the number of loans agreed but not yet made to buy a house fell to a seasonally-adjusted 97,000 in July compared with 112,000 in June. If this slowdown is true, then one must be very selective about how and where one would invest in the UK property market.

So what is the alternative? Rather than commit a large capital outlay, property funds (collective investment schemes) are increasing in popularity as investors pool their funds together into the one investment fund.

This creates a low-cost outlay for investors who in turn benefit from the combined funds of other investors. Avoiding stamp duty, direct capital gains tax and legal expenses are also obvious benefits of investing through a fund.

There is a mixture of residential, student-rent and commercial property funds available that invest in the UK and, bearing in mind the potential slowdown in the residential market, there is one area that is catching the eye of an increasing number of investors, and that is in the social housing sector, especially in the north of England.

There are funds that buy properties to meet the growing demand for social housing with a large proportion of the rents being paid directly from the benefits agency themselves. This gives a high level of security on regular rental income.

House purchase prices are also incredibly low, with the average price less than £30,000, therefore offering a large potential for capital appreciation. The funds can also participate in the student and young professional housing market as well as off-plan and pre-completed developments.

The main drivers behind funds that invest in the social housing sector are the very high rental yields. Capital asset appreciation gives added value to these funds over the medium term but is looked on as a bonus rather than the core driver as target rental yields from the fund are 8-10% per annum.

There is always a risk when investing in property but the social housing sector remains attractive compared to alternatives and you can invest to this area through the appropriate investment funds from as little as Lm10,000.

Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 (office hours) or e-mail mh@hollingsworth-int.com.

Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.