The problems affecting the former star share-picker Neil Woodford will have raised concerns among the millions of fairly ordinary people whose financial futures are invested not just in this but also in similar vehicles.
Once head of investment at Invesco Perpetual, where he handled more than £15 billion of funds, Woodford left to set up his own business in 2014, since when his talent for making the right choices has given him almost the equivalent of rock star status in the personal investment community. Recently, however, it became clear that his flagship Income Equity Fund had hit troubled waters, leading to investors being locked out from withdrawals on 3 June.
This got me thinking about the pros and cons of “hands-on” investment in property compared to funds. And one of these is that the owner of a failing, or underperforming, property is unlikely ever to be prevented by a third party from cutting his losses and selling it on. I do not believe that the current troubles affecting the Woodford fund – which, let’s hope, are only temporary – will lead to a rush into residential property but it could lead to a reassessment of personal portfolios of which property might be one of the beneficiaries.
Let’s be honest, property’s investment star has waned somewhat in recent years, mainly, but not exclusively, as a result of tax changes (at both Westminster and Holyrood) and increased regulation (some of it positive, some of it self-defeating) that has pushed up landlord costs. The result, overall, has been a reduction in net returns from rental income.
On a more positive note, capital appreciation has not, in general, undergone a diminution and, indeed, in some locations is better than ever, which to me confirms the underlying strength of residential property as a safe and asset-growing investment.
However, this makes it more important than ever for the potential investor to place greater emphasis than ever before on location. Get this right and you are already more than halfway there; get it wrong and your investment could struggle from day one. So once an affordable outlay has been drawn up, the potential investor should then identify every neighbourhood in a city or urban conurbation where properties are in his or her budget. In such circumstances it is tempting to go for a “middle market” area or a new-build or pristine property in “move-in” condition on an edge-of-town estate. However, the more successful investors are those who focus on trying to secure a property in a high-end area popular with renters who work in the professions. It always makes greater sense to choose a one-bedroom flat in a location such as this than a three-bedroom semi in the suburbs. But the greatest returns of all go to those prepared to be bold and search for a below-market deal in a high-end area. The price of such a property will, of course, reflect its condition but assuming it is wind- and water-tight and requires only a refurbishment the added value brought about by an upgrade will far exceed the cost.
I have no wish to put potential investors off middle- and lower/middle-market locations, given the level of demand for private rentals across society. However, with capital appreciation being such an important factor, affordable “opportunities” at the top end will almost certainly deliver the best overall returns.
Sadly, even landlords with high-end properties can see their investment diminished if saddled with a tenant who stops paying rent – especially the barrack-room lawyer type able to spin out the situation (and live rent-free for many months). When the Scottish Government recently made “no fault” evictions law (effectively giving responsible renters indefinite security of tenure), one quid pro quo was supposed to be speedier evictions of non-paying or anti-social tenants. So far, the extra resources to enable this have been wholly inadequate. The property sector has embraced the changes, so the government should now deliver its part of the bargain.
David Alexander is MD of DJ Alexander