Question & Answer with Joe McTaggart - CEO of Walls & Futures REIT plc
What is the most appropriate strategy if you are thinking about investing in property - Capital Growth or Income generation?
For many people, investing in residential property has involved buying an apartment or house often via a ‘buy to let’ mortgage. The property is subsequently let and the investor has the view that the investment will at least generate a modest income. Over time, the property ideally should benefit from capital growth which could then be realised when sold at some point in the future.
What the majority of investors typically fail to take into consideration is how important income is to the overall return profile of the investment. Research from MSCI, a leading provider of investment indexes, on sources of real estate returns and volatility found that over the long-term, income contributes almost 80% of the total return, while capital growth contributes almost 90% of the total volatility (risk).
Companies, such as REIT tend to focus on generating secure long-term income for investors. Walls & Futures differs in that we aim to achieve a blend of both capital growth through the development of new homes and income through long-term leases. Our long-term target is to deliver a total return of between 7-9% of which 3-4% would be paid out as a dividend.
What are the costs that should be considered if you are looking to make a direct investment in residential property?
There are a number of costs that you should take into account if you are considering a direct investment in residential property.
1. Stamp duty
Depending on the value of the property, stamp duty can range from 0% - 12%. If however, you already own a property, i.e. your primary residence, you will need to pay an additional 3% stamp duty on any subsequent properties which will eat into your return.
While Walls & Futures is not exempt from paying stamp duty. We are able to minimise the amount we pay through our new development strategy, paying stamp duty only on the value of the land rather than on the value of the property once competed.
Furthermore, because we are quoted on the NEX Exchange Growth Market, you can purchase our shares without paying stamp duty.
2. Running & Maintenance charges
Often the headline rental income figures could make a retail investment look attractive. However, it’s also important to factor in the full ongoing costs which are likely to include;
• Letting agent commissions and the cost of setting up the tenancy
• Service charges and ground rents
• Property maintenance - i.e. boiler servicing and gas safety certificates
• Voids - your property could be empty for 1-2 months between tenancies depending on the time of year it becomes vacant
Walls & Futures’ strategy is to let properties targeting the social housing sector to established charities and housing associations on self-insuring and repairing leases, typically 20-25 years, with rents increasing in line with inflation.
When investing directly in residential property you will be liable for tax on the income and on the capital gains (CGT) when you sell it.
Historically, residential property investors have been able to deduct the interest portion of their mortgage as a cost when calculating the net profit for tax purposes. However, from April 2017 this tax relief was phased out with the amount that can be offset being gradually reduced to reach the basic rate of tax by 2020. Rating agency S&P Global examined 160,000 securitised buy-to-let loans taken out between 2014-2016 and found that 60% would effectively become loss making as higher rate tax relief on mortgage interest was phased out.
Capital Gains Tax (CGT)
When selling a property an individual maybe liable to pay CGT on the profit, which currently can range from 18-28% depending on whether you are a basic or higher rate taxpayer.
As a Real Estate Investment Trust (REIT), Walls & Futures is granted a special tax status which means we do not pay corporation tax on the profits and gains from our property rental business.
Self-Invested Personal Pensions (SIPPs) & Individual Saving Accounts (ISAs)
SIPPs & ISAs are popular tax efficient methods of investing, although they cannot be used to make direct investments in residential property. It is however possible to hold shares in a quoted property company, such as Walls & Futures.
Please be aware that your capital is at risk and returns are not guaranteed.