I read this article yesterday and it nearly turned my stomach “Retirement in ruins: Cladding scandal sees buy-to-let investors left high and dry – with plans in tatters and properties almost worthless” It goes to show that investing in property is far from a one way bet.
I’m going to leave aside the tragedy of Grenfell Tower, that was a truly horrific thing to have happened and as someone who’s home once burnt down before, I know that losing a home is traumatic. To lose your life, or your family’s or friends and neighbours is something that I can’t quite imagine. This article isn’t quit from the human / emotion point of view (unless you think that people farmers are human and have feelings)
However, what I want to highlight here are 3 things:
- “Investing” in property is inherently risky especially as your pension
- Chasing yield is risky
- We need more and better building of housing
The article is worth a read in itself, because it does sort of screams “WON’T ANYONE THINK OF THE INVESTORS” at you. These are older people who bought flats that have cladding that requires fixing and their flats are now “worthless” apparently.
There’s the story of how one couple bought a flat 18 years ago in Leeds for their retirement and now aged 72 the increase in costs like insurance, safety measures and an £8 million bill to remediate the cladding will dent their finances. What sort of pension is that? It’s more like a reverse lottery where you get paid each month for a ticket (rent received) and maybe, just maybe you’ll hit the jackpot and be asked to pay back £100,000. The couple in question say that they can afford it but many others can’t.
The fact that the average property costs the same as several years salary or to put it another way, the cost of property is maybe twenty times the rental income means that hoping to sponge off rental income requires owning a massive value of property. If you aim to afford all this property by getting a mortgage, the use of leverage makes things several times worse if things don’t go to your Panglossian plan.
If I only had 3 shares in my pension: Diageo (booze), BP (petrol) and Unilever (food) then chances are I would be ok most years. Dividends could come and I’ll be fine. But at least there’s over 50,000 people working at each of those companies for me (the shareholder). Owning a clutch of properties and expecting to have an reliable income stream is daft. If a Deepwater Horizon event happens (and they will), that’s where diversification comes in handy but putting all your eggs (plus borrowing more) in the one property basket is unnecessary risk taking.
Conventional wisdom tells you that over time, rents increase. However, I am not sure that is particularly the case when it comes to certain types of property. Once swanky new build luxury apartments become rundown flats. Modern bathrooms, kitchens & furnishing become dated and require replacing at considerable expense. In this light, hoping to buy something now and have a steady income for the next 25+ years from property seems foolhardy and it is this yield chasing that is risky. Yields on cheaply built flats that have a high yield now (or even worse the “guaranteed rent” schemes that just inflate the sale price to pay you that rent back for the first few years) but it’s not sustainable. I’ve not even mentioned voids which can be a big trouble if your flat is in an area of oversupply. Borrowing money only makes this worse as your cashflows worsen over time as ground rent, factoring, maintenance fees and everything else only go up over time, so by the time you need to retire for real you are left with an asset that is not making you much money.
If there is a place for investing in property, the risk to the individual investor is just too high in my opinion to own a few houses and hope that everything works out. Also, it neglects the fact that owning property is not the same as building it and we need more homes. Quite frankly, many of the flats built in the last 20 or so years are not fit for living in, with cheap fittings and poor quality build. Cladding is of course a major concern but future building needs to not only be safer but greener and better quality. I’d welcome funding from pension funds to build and manage housing projects if the government is unwilling. You’d ideally have professional management of property maintenance instead of the DIY BTL brigade. Having a system where developers build, investors buy and tenants rent doesn’t work – it’s only now that the savvy investors are getting hurt that the likes of the Daily Mail start caring. The interests of the developers, owners and renters needs to be aligned. Change the incentives and it might give the pensioners fewer sleepless nights too.