Property vs Annuities

With the changes to the pension regulations that came into effect in April of this year, we at Martin and Co are seeing an increasing number of enquiries coming from people approaching pensionable age, who are considering property investment as an alternative to traditional pension annuities.

For many “soon to be” pensioners, the reform to the pension regulations, will bring the opportunity for many to invest in property, who have previously had little or no experience in this area.

Naturally, people of the age and experience who have saved throughout their lives to provide for their retirement are naturally cautious, and it’s great to see these people already researching their options in advance, and seeking advice from experts in the lettings market, such as the team at Martin and Co in Newcastle under Lyme and Stoke on Trent.

In order to give the best advice possible to these would be property investors, it is important for us to understand what the individual or couple is looking for from their investment.  In general terms people are usually looking to achieve one or more of the following results from their investment.

1. Generation of a regular monthly income to supplement savings and other pensions
2. A better return on their savings to the current low market interest rates
3. Investment to achieve a capital return on their investment, which can be sold at some point in the future should circumstances change and the money released.
4. Investment in an asset which should achieve capital growth over a period of time, or an income for their children or grandchildren.

It is only when we understand the reasons behind someone looking at a property investment that we can give them suitable advice.

Perhaps the best way to explain this is to use a recent example of a couple who were looking to invest in either the Penkhull Area, or around Werrington, as they had good local knowledge of both areas, and believed they were the right areas in which to invest.

Looking at the example of a 3 bedroomed semi-detached house in these areas, both make good sense from a rental perspective.  Three bedroomed houses are in relatively short supply, and will always rent faster than the more plentiful 2 bedroomed terraced properties, and as they generally attract people with families, the average tenancy length on a three bedroomed property is usually longer.

From a financial yield point of view, the Penkhull property would attract an average rent of £536 per calendar month.  This compares to £600 for a similar property in Werrington, and both of these achieve the same rental yield of 5%.

 

However, when we look at the investment needed to buy these properties, and the capital growth, one can see a real difference.   An average property in Penkhull would cost around £118, 828 in the current market, whilst a similar property in Werrington would cost £168, 058, so straight away we can see that the entry level to a Penkhull investment is significantly less than Werrington.

 

The comparison becomes even more interesting when we look at the capital growth of the respective areas.

 

In the last 5 years the average property value in Penkhull has increased by £8562.  Although this is less than the £9636 that the average Werrington property has increased in value by, the return has been far greater, due to the lower purchase cost in Penkhull.  Therefore a Penkhull property has generated a 7.8% return over this period, compared to £6.1% in Werrington.

 

So, in this particular case, using our experience of the local property market, we were able to give evidence backed advice to our new investors.  It was clear to them, that they could stretch their savings further by investing in Penkhull, and with the popularity of this area due to the hospital there would always be a strong demand for rental property.   When combined with the couples desire to invest in property not only to generate a monthly income for themselves, but also to assist their grandchildren in entering the property market in the future, Penkhull is the right location for them.

 

If you are looking to invest in property in the future, for whatever reason, and want advice based on our knowledge of the local sales and property market in Newcastle under Lyme and Stoke on trent, please give us a call now and ask to speak to Debbie.  We are also currently offering for sale a number of small property portfolios in the area, suitable for investment.