Residential property is about achieving the best possible rental yield, not about the architectural merits of the house (unless of course you can charge more for them).
As a young estate agent working in the affluent London suburb of Fulham, Joe McTaggart was tasked with finding a rental property for a client.
“I asked, ‘What exactly are you looking for? Income, growth?’ and he replied, ‘No high ceilings, cornicing and a south-facing garden’.
“That’s like going to a stockbroker and saying I want to make some money, but I only want to invest in companies that make nice shoes. It ignores the fundamentals.”
The story illustrates the cock-eyed way some greenhorn property entrepreneurs approach the market.
Residential property is about achieving the best possible rental yield, not about the architectural merits of the house (unless of course you can charge more for them).
Fifteen years in the business, first on the front-line as an estate agent and then as a professional investor, has taught McTaggart a lot.
That distilled knowledge, and the experience of co-founder David White, is being brought to bear at Walls & Futures (W&F).
The company is a real estate investment trust (REIT), which listed on the ISDX market recently, raising just over £1mln.
In the W&F portfolio currently there are three properties in and around the Wimbledon area worth £2.3mln. They typify the approach taken by W&F. They are finished to a high standard, which means they attract high calibre tenants and, crucially, are easier to maintain.
There is also re-development potential with one of the homes, and that is something McTaggart is keen to incorporate in the portfolio as it grows.
“That’s the methodology and strategy we want to use. We will always look to add value,” said the W&F chief executive.
“The market can’t be trusted to go up infinitely so we’ve got to do something to our properties to make them worth more.”
The focus of the REIT will be the rental market of the south-east and London, where there is still potential for capital growth.
It is also planning a move into supported social housing – bespoke homes for people with special and complex needs.
“These are vulnerable people, where the requirement for the right sort of accommodation is escalating,” said McTaggart.
“What we want to do is to create a quality product. The market [for supported social housing] can best be described as variable.”
Currently, there is an estimated shortfall of 15,640 places for people of working age, so the demand is there.
Leases tend to be long-term – anything from five to 20 years – guaranteeing a regular income.
The plan is to generate a long term annual return of 7-9% across a portfolio of social and private residential properties.
REIT status confers certain tax advantages, but it also means 90% of W&F’s earnings must be paid out to investors. It is targeting an annual 3-4% distribution yield.
The reason for starting W&F was quite simple, McTaggart says. It was about democratising investment in the residential property market, while piggybacking on his and chief operating officer White’s experience.
As he points out, M&G has a residential fund, but it is designed for institutional investors, while on the flipside there are small, unregulated operators with patchy oversight.
Oh, and of course there is always the option of going out and purchasing a buy-to-let property, with all the work and pitfalls this entails.
“The business is about enabling people to invest in residential property and leveraging our expertise,” says McTaggart.
“Up until now it [the residential market] has only been accessible to a certain narrow group.
“The bottom line is we want to democratise property investment.”
This article was originally published in Proactive Investors 13th Dec 2016