We are often asked which is better – property or an investment portfolio. Below, Dan Atkinson, Head of Technical at EQ Investors, answers all your questions.

We invest many things during our lifetimes. Whether it’s time, money, or experience that we are investing we are always looking for a future outcome. When we invest money it’s important to frame our decisions with what we want our future to look like. It’s helpful to have this approach when we decide how to invest our money.

One decision people often consider is should they purchase a buy-to-let property, or should they build an investment portfolio? It’s not quite a clear-cut decision and a better question would probably be, what mix is right for you? Let’s have a look at some of the important factors you need to think about.

Buy-to-let

Many of us are familiar with the housing market and have watched our own properties increase in value. A property rented out to reliable tenants can be an excellent source of income. Rents vary hugely across the country, so always do your research.

It is important to remember there will be costs to cover such as general repairs and maintenance, agency fees and insurances. These costs will continue whether you have paying tenants or not. As a landlord you will also be taking on a number of legal obligations which may result in additional costs. You can outsource some of your responsibilities to a manging agent but this will reduce the return.

However, over the last few years the Government has started to reduce the tax efficiency of property investment. Investors will pay an extra 3% Stamp Duty Land Tax when they buy a residential buy-to-let property. They also previously enjoyed Income Tax relief on mortgage interest, but this is also being reduced and will be restricted to 20% from April 2020. When they eventually come to sell their properties, this will now be subject to Capital Gains Tax (CGT) at 18% (within basic rate band) or 28% (higher and additional rate taxpayers) on the gains.

This coupled with rising property prices leading to lower yields makes it harder to find the right property and more expensive to build a diversified portfolio than it was in the past.

Investment portfolio

Investment portfolios can potentially enable you to spread your investment more widely as you are not having to buy one expensive asset. This means that investors can build up more diversified portfolios to generate income and capital growth. Instead of having their investments just in one town, city, or country they can invest across the globe. Spreading their money into different types of investment such as property, equities, and bonds helps reduce some of the risks.

Whether you choose to build your own portfolio or delegate this to a professional, there will be costs. These relate to the ongoing management of the funds, ensuring that the overall mix remains suitable for you, and a structure to hold these safely and securely.

Investors have a choice about how they hold their portfolio. ISAs in particular provide freedom from Capital Gains Tax and Income Tax; you can add £20,000 to your ISA each year.

Income generated by a portfolio is taxed differently to property. For investments held outside an ISA, the first £2,000 of dividends are tax free and the subsequent rates (7.5%, 32.5% and 38.1%) compare favourably with the main rates of Income Tax (20%, 40% and 45%). Some of the income generated by a portfolio will be taxed as Interest and most investors will have a tax-free Personal Savings Allowance of up to £1,000. The respective rates of Capital Gains Tax are also lower at 10% and 20%.

Perhaps the biggest advantage of using an investment portfolio approach is liquidity. It isn’t possible to dip in to the capital value of a buy to let property without selling the whole thing. In comparison you can sell part of an investment portfolio if you need access to capital. As well as the practical and tax considerations, it is normally a lot quicker to sell an investment than a property.

In summary

So what about you?

As with many aspects of life and financial planning there is no easy answer. You should consider what you need this money to do for you. For most people our money is there to serve our lifestyles (current or future). If we start to find managing the money takes away from this then we probably need to reassess our decision.

If you are likely to need to dip into it then an investment portfolio might be more attractive. Delegating responsibility about where to deploy your money and the day-to-day management may also become desirable as how we want to spend our time changes.

According to the statistics, Price Central London began to witness a recovery in Q2, both in sales volumes and prices. This follows 2 years of stagnation as buyers held back due to Brexit and residential tax headwinds. The increase in average prices, however, can largely be attributed to a surge of high value sales with buyers taking advantage of price discounting at the luxury end of the market. Underlying price appreciation for the rest of the market remains significantly less buoyant.

England and Wales and Greater London continue to see falling transactions and slower overall price growth, impacted by the introduction of mortgage caps, the instability in the domestic economy and the growing new build crisis.

Price Central London (PCL)

• Sales volumes have strengthened slightly, with an annual increase of 4.8% to 3,885
• Average prices reached £1,946,151 in Q2 2017, representing quarterly price growth of 7.9%
• Despite the statistical increase, this has been buoyed by a number of high value transactions and an increasing proportion of luxury sales
• Q2 2017 saw the most expensive sale ever to transact through Land Registry at £90m for a flat in 199 The Knightsbridge Apartments
• As a result, the top 10% of the market performed particularly strongly in Q2, seeing a 20% increase in average prices to £8m
• The most active sector this quarter was the £5m - £10m bracket, where the proportion of sales increased by 23% over Q1
• Excluding the top 10% of the market, average quarterly price growth was 4.5%
• Growth in the buy to let sector was the most sluggish with a 1.3% increase in average prices for property under £810,000

Average prices in Prime Central London reached £1,946,151 in Q2 2017, following quarterly price growth of 7.9%. Despite a slow down as the market adjusted to increased residential taxation and Brexit, this recovery is, in part, a result of buyers seeking safe havens in the face of increasing uncertainty as tensions mount in the USA, Middle East and worldwide, together with the attractions of weak sterling and low interest rates.

Transactions in PCL have strengthened marginally in Q2, following a prolonged period of falls from 6,044 in Q2 2013. According to LCP’s analysis, 3,885 sales have taken place over the last 12 months, representing a small increase in annual sales of 4.8%.

Notwithstanding the headline figures in Q2, a detailed analysis indicates that price increases have been buoyed by a number of significant high value sales, including £90m for a flat in 199 The Knightsbridge Apartments, the most expensive sale ever to transact through Land Registry. As a result, a particularly strong performance has been seen for the top 10% of the market with prices increasing 20% to average £8m. With this excluded, average growth falls from 7.9% to a more typical 4.5%.

However, whilst homebuyers have capitalised on luxury property discounts, a divergent dynamic is being seen in the lower value market. Price growth in the buy to let sector was the most sluggish, reflecting a 1.3% increase for properties under £810,000. The proportion of sales under £1m also decreased by 9%, compared with a 20% increase over £5m.

Naomi Heaton, CEO of LCP, comments: “The increase in average prices appears to reflect a greater proportion of high value properties being sold, rather than any significant underlying growth. Not only have we seen some very large individual sales but transaction data shows the £5m - £10m bracket was the most active in Q2 with a 23% increase over Q1. This can be attributed to international homebuyers taking advantage of notable price discounts, alongside beneficial currency exchange rates. The buy to let sector, on the other hand, is seeing a much slower picture as investors continue to adopt a wait and see attitude.”

“Looking at the monthly breakdown gives us a clearer picture of what is really happening in the market overall. Whilst bumper transactions boosted average prices to as high as £2.2m in April and May, which included the most expensive sale to register through Land Registry at £90m, June reflected a more sedate picture with average prices falling back to £1.65m.”

Greater London

• Average prices have shown quarterly price growth of 4% and now stand at £634,234
• However, annual transactions fell by 24% in Q2, resulting in a low of 88,545 sales, half those 10 years ago

Heaton comments: “Greater London is principally a domestic market and whilst prices continue to show growth, slowing sales volumes reflect the current state of the UK economy. Concerns around Brexit have impacted the ‘feel good’ factor which drives buyers’ decisions, whilst affordability issues resulting from caps on mortgage lending have hampered buyers ability to trade up or get onto the housing ladder. Falling sales volumes are also exacerbated by problems within the new build sector. This has seen international speculators pull back in the face of uncertain or negative returns. It is reported that the number of new building starts in London will fall to just 21,500 this year, meaning only 18,000 new homes will be built by 2021.”

England and Wales

• Average prices in England and Wales have shown almost nil quarterly price growth at 0.27% and now stand at £287,823
• Transactions fell by 12% in Q2 with 844,380 sales annually, the lowest since Q2 2010

Heaton comments: “Despite Government measures to reduce Stamp Duty for 98% of the market and schemes to promote activity such as Help to Buy, weaker sentiment and restrictions on borrowing continue to impact on the domestic market in England and Wales. With static price growth in Q2 and annual transactions levels falling a further 12.3%, the Government seriously needs to address the growing affordability issues within the sector and support the building of more low-cost housing for buyers. The artificial stimulus packages and tax reliefs do not appear to be reinvigorating new buying activity.”

(Source: London Central Portfolio Limited)