Home comforts: Building residential property investment on solid foundations
By creating quality, affordable homes targeted at people on middle incomes, our residential development investment portfolio is able to deliver steady returns across the cycle.
I have been actively involved in residential property development for more than 25 years, first at Close Brothers and now at Stellar Asset Management. Residential development can be an attractive investment for our private investor and business owner clients, generating low risk and tax-efficient capital growth. It can also deliver important social and economic benefits for local communities and our country as a whole.
The investment rationale is rooted in rising demand for new housing and the persistent shortage of supply. Both national and local government home building targets are rarely if ever met. As people live longer, young people struggle to get on the housing ladder and a large part of the supply is swallowed up by buy-to-let investors, the need for new homes to bridge the gap can only grow.
From a tax-efficiency perspective, investment in residential development qualifies for Business Relief, which would eliminate inheritance tax liabilities after two years.
However, this isn’t quite as simple as build it, sell it and make a profit. Residential property is a vast market from both a regional and price perspective. One of the big decisions is therefore where to target the investment. At Stellar, we aim to generate an average 5% per annum return on investment in developments. Accordingly, our developments target homes for people on middle incomes. This is the segment where experience shows that the returns are steadiest and price fluctuations are lowest across the cycle.
The high demand and shortage of supply in this mid-market mean that whatever is happening at the top and bottom of the price range, sales are always strong. People in this segment can often find itself squeezed between social housing that they do not qualify for and high-end developments that are outside their price reach.
Would we consider other segments? Developing luxury properties for Premiership footballers, overseas investors and other ultra-high net worth buyers can have an ‘all that glitters’ allure, but is in fact a highly volatile, highly personalised and often quite saturated market. In turn, we do not invest in social housing as it would require us to be a full-time landlord with all the inherent risks and costs.
Our main criterion for judging the target value of the properties we want to develop in a specific location is qualification for the Government’s ‘help to buy’ equity loan scheme – maximum 1.5 times the average first-time buyer price in each region. While we do not just sell to help to buy recipients, developing homes in this affordable price bracket helps to increase the available number of buyers and ensure that we are honing-in on our mid-market strategic target.
The current (2021-2023) help to buy ceilings range from £186,100 in the North-East to £437,600 in the South-East. London is higher, but we do not invest there as the prices for land and costs of development are exceptionally high and the property values can often be quite volatile.
The foundations for investment security are the tangible assets of land and real estate. We also spread our developments across different regions to diversify the investment and reduce exposure to any local movements. We tend to have around ten developments running at any given time.
Further safeguards come from the fact that we do not just invest in property. We diversify our portfolio across seven asset classes, which include hotels, golf clubs and care homes.
Rather than going through the lengthy and risky planning approval process, our strategy is to acquire the freehold on land with full planning permission for residential development. We work with residential development specialists to source and acquire opportunities, and to develop the land for residential use. We aim for these developments to be completed and sold in around two years.
Our main focus is small developments on sites with detailed planning permission. Typical examples include nine new dwellings in the village of Nayland in Suffolk. In addition to providing affordable homes, the developments create work for local builders and suppliers.
In some cases, we also develop homes in disused buildings. A good example is the 68 new apartments we are developing on the site of the former Barkers Shoe Factory near the centre of Northampton. The sensitive conversion has restored the derelict factory building and sought to retain as much of the industrial features as possible. The Barkers Building development also includes a new building in keeping with the original. With prices starting at £130,000 and the nearby station offering rail links to Birmingham and London in less than hour, the development is affordable and accessible to a broad range of occupiers.
Realising the potential
So, property investment can be both rewarding and secure, but it needs to be targeted well, developed to a high standard and diversified to offset any local market fluctuations. This is what we aim to do here at Stellar.
In coming articles, I will be focusing on some of the other assets in our portfolio, the dynamics within these markets and the potential this offers for you and your clients.
If you would like to discuss any of the issues raised in this article, please get in touch with one of our team today on 020 3195 3500 or contact email@example.com.
Written by Jonathan Gain
Stellar Asset Management Limited does not offer investment or tax advice or make recommendations regarding investments. Prospective investors should ensure that they read the brochure and fully understand the risk factors before making any investment decision. The value of investments and the income from them may fall as well as rise and is not guaranteed. No assurance or guarantee is given that any targeted returns will be achieved. Forecasts of potential future results are not a reliable indicator of actual future results.
Stellar Asset Management Limited of Kendal House, 1 Conduit Street, London W1S 2XA is authorised and regulated by the Financial Conduct Authority.