1. INTRODUCTION
The real estate market is an essential feature of the United Kingdom’s economy. The industry is the largest in the UK and the second largest in Europe after Germany. The market share is estimated to be around 250 billion euros. Foreign investors and developers view London as an ideal area when searching for markets with a high growth rate and returns. The high growth rate is as a result of support and encouragement the UK government accords real estate projects. Considering the country’s economic and political stability, making an investment in real estate in the UK is a successful venture. Political events such as elections have a minimal impact on the real estate market stability.
The online real estate market is booming having been dominated by portals that provide a list of properties available. The online portals have adopted the latest technologies with the use of virtual reality gaining popularity. The virtual reality offers the players in the market the opportunity to tour real estate listings remotely (Wrtche 2010). The potential customers have the ability to walk-through apartments and related projects before they are built. The technological advancements have resulted to a boom which is attracting investors from far and wide, and this leads to the research study aiming to establish the best investment strategies that both foreign and domestic investors can use to gain maximum return on investment.
1.1. REAL ESTATE AND INVESTMENT COMPANIES IN THE UNITED KINGDOM
The primary research data has been collected from 3 real estate and three investment companies. The companies in the real estate industry include IPE Developments, Cadogan Group Limited and Great Capital Partnership. The investment companies include Allianz Technology, F&C Global Smaller Companies, and Finsbury Growth & Income. IPE Developments are an arm of the IPE Group that concentrates on real estate development. The company is based in central London having been established as a mid-market firm that makes smart investments. The real estate development company develops quality and sustainable developments within London and is involved in projects from the inception stage to completion.
Cadogan Group Limited is a British management and property investment company that is owned by the Cadogan family. The company is the major landlord the districts of Knightsbridge and Chelsea in West London. The company’s estate covers over 93 acres which include office, retail and residential space with 3,000 flats, 500,000 square foot of office space, 300 shops, and 200 houses. Great Capital Partnership was formerly known as the Capco London Partnership develops and invests in retail and office properties and is based in London. Allianz Technology is an investment company based in the UK that invests in the technology, equity securities, and real estate industry. Finsbury Growth and Income Trust PLC invests in a share of real estate UK-listed companies with the aim of gaining capital and growth of income.
2. RESEARCH QUESTIONS AND OBJECTIVES
The primary goal of this research study is to establish the best investment strategy in the real estate industry in the United Kingdom which will yield a high return on investment with reduced risks. Therefore, the research will investigate the following question:
• Which is the best investment strategy to be used by investors in the real estate market in the United Kingdom?
Determination of the best investment strategy will be the focus of the research study through the analysis of the strengths and weaknesses of most common strategies and the challenges being faced by potential investors in the real estate market in the UK. The objectives of the research study are as follows:
• To identify investment strategies applicable in the real estate market
• To analyze the strengths and weaknesses of the different strategies available
• To identify the best investment strategy in the real estate market in the United Kingdom
3. LITERATURE REVIEW
Investment strategies work differently for investors in the various fields. The best investment strategy, in this case, is the strategy that works best for the real estate industry. An investment strategy can be defined as a guide that helps an investor during asset allocation. Policies can be based on risk tolerance, investor goals, and future capital needs. There are investment strategies that focus on rapid growth and capital appreciation while others follow a low-risk approach in the bid of wealth protection. This research study aims at identifying the best investment strategy in the real estate industry in the UK. There are two theories that have been in existence in relation to investment strategies. The theories are the fundamental analysis and the modern portfolio theory.
3.1. FUNDAMENTAL ANALYSIS THEORY
One of the most basic forms and the oldest style of investing is the fundamental analysis. In this type of investment strategy, an investor analyses the financial statements of players in the industry and compares the past and present data present to check the viability of a project. The data collected is used as a comparison measure of the project with similar and identical projects within the industry. This form of active investment strategy is necessary before deciding to invest in a project, especially in the real estate industry. (Eldred 2012)
3.2. MODERN PORTFOLIO THEORY
The modern portfolio theory is an investment theory that was introduced by Harry Markowitz in 1952. The theory aims at achieving a balance between minimizing risks and maximizing returns using a mathematical model. The economist argued that investing in different industries is less risky compared to owning one financial asset. This theory may not be an ideal investment strategy for the real estate industry because the model in the theory does not match with the practical aspect of the real estate market. There has been a gap in research of investment strategies since no research study concentrated on the real estate market in the UK. The lack of current data has led to the need for the research study.
3.3. INVESTMENT STRATEGIES IN THE REAL ESTATE INDUSTRY
BUY AND HOLD
This is the most common method of investing. It is the simplest and purest form of real estate investment, and it involves the purchase of an asset and renting it out for a particular period. The buy and hold investment strategy aims at creating wealth through the renting or leasing process by the collection of cash on either a monthly or quarterly basis. The property is usually held with a vision of selling it at a profit in the future. One advantage of this strategy is the fact that during the holding period, the property still generates revenue through payment of rent. During the process of purchasing the property, it is essential for the investor to carry out a property evaluation by understanding the deals and evaluating opportunities. The most common mistake that investors who are not well acquainted with the industry make is the purchase of bad contracts because of a lack of understanding of property evaluation. The poor decisions related to this strategy include poor tenant selection, poor property management, and underestimation of expenses. An investor should learn the rules of business before investing for him to avoid the mistakes. Lack of proper education in the real estate industry can prove to be costly both financially and legally.
For best results from the buy and hold strategy, an investor should know how to effectively identify flows of the entire industry and the region the property is located. During an overheated economic season in the real estate market, the investor implementing the buy and hold strategy tends to stop the purchase of new property until the market settles down. During the low season, the investor may continue purchasing property and continue to hold them.
The real estate market has a cycle in which every potential investor should understand to avoid losses. The first stage in the sequence is the peak. At this phase, the property prices are high, and the amount of inventory is low. The season has a high number of offers which may be above the original price. The next phase is the tipping point which is marked by the fall in property prices and a rise in foreclosures. In the tipping point phase, the property owners owe more than the valuation price of the property. The decline follows, and there is a continued fall in prices with flooding of foreclosures in the market. The bottom occurs after the drop and investors purchase the excess inventory. This phase is characterized by the increase in cash flow and deals. The climb proceeds to the bottom stage, and at this phase, there is an increase in the volume of sales and property fetch higher prices. Confidence among property owners and investors improves and most people will sell the property at this time. For an investor, the real estate market cycle is significant to the buy and hold real estate investment strategy.
FLIPPING REAL ESTATE
Flipping real estate is the most popular strategy in the real estate industry. This strategy involves the purchase of property at a low discounted price, making suitable improvements and then selling it at a profit. The “buy low, sell high” model used in most retail businesses is quite similar to the flipping real estate strategy. The single-family home is the most popular real estate property to implement the flip tactic. The 70% thumb rule is followed in this strategy. The law states that an investor willing to become the property flipper purchases the property at 70% of the property’s value after deduction of any rehabilitation costs incurred.
The flipping strategy requires that the investor buys, rehabilitate and sell it at a profit as fast as possible. Speed is essential to ensure maximum benefits and reduced expense costs. Flipping is a day-to-day activity, and once an investor stops flipping property, then the cash flow stops until the next flipping job commences. (Esajian 2014)
WHOLESALING REAL ESTATE
The wholesaling real estate strategy involves the process of establishing lucrative real estate deals, writing down an acquisition contract and then finding a buyer who is willing to buy the contract. The investor who chooses to be a wholesaler does not own the piece of real estate property but uses marketing strategies in a bid to try and get unusual and profitable deals. During the sale of the contract, the investors are paid an assignment fee which is dependent on the size of the agreement undertaken. The wholesaler can be referred to as a middleman who makes money from finding lucrative deals. Property wholesalers tend to sell their contract deals to retail buyers, but in most cases, they see fellow investors such as house flippers who are buying in cash instead of a mortgage. (Merrill 2014)
When dealing with another investor such as a house flipper, the wholesaler can receive money within the shortest time possible and will have gained a stable connection and a secure network in the real estate society. Because of the secure strategy reputation, most newcomers in the real estate market choose to venture into the field of wholesaling because the start-up costs are low at the beginning. There are no additional costs such as renovation, contractor, loan servicing fee, and other bank charges. Most real estate gurus teach new investors this strategy even though it is not as easy as it sounds. Before one can become successful using this strategy, an investor has to continually seek the best deal and establish an adequately designed marketing strategy that will attract the leads on a continual basis and also buyers for the property acquired. Even though the cost of start-up is low, most of the resources are used for funding the marketing funnel. Once an investor has sharpened his wholesaling skills, he can find great success and a respectable source of income and discover more profitable strategies in the industry.
REAL ESTATE INVESTMENT TRUSTS
Other than purchasing property, there are different ways in which an investor can make money and gain a return on investment in the real estate market. If an investor finds an excellent real estate investment trust, the return on capital can be in the form of dividends paid monthly. The real estate investment trusts appear to be original ideas that will offer potential investors attractive returns.
An impending influx of capital is expected to be beneficial to REITs because real estate has shifted from being under financial institutions such as banks to being an independent industry. A lot of interest has been generated as a result of the shift in the new real estate sector. The REIT portfolio is an attractive idea for investors seeking to adopt an investment strategy in the real estate market. In the coming years, the most valuable asset an investor will have is the REIT portfolio. (Mullaney 2013)
SECONDARY CITIES INVESTMENT STRATEGY
Investing in developed and fast-growing cities is lucrative because of the subsequent profits generated but the competition posed may deem the investment not worth the struggle. The smaller markets tend to be significant investment opportunities with a guaranteed return on investment because of the low competition and market concentration. Most investors are shying away from investing in the large gateway cities and in return putting vast sums of investment money in smaller towns which are less competitive secondary markets.
AIRBNB INVESTMENT STRATEGY
Airbnb is a type of investment strategy that is similar to buy and hold a property investment strategy. The property is a vacation and in most cases short-term rentals. Some factors have to be considered by an investor before investing in an estate to be used as an Airbnb. The factors include management of tenant or tourist turnover, area occupancy rates, and government regulations regarding the type of investment. There has been a significant increase in the Airbnb property investment in the UK and has proved to be more profitable than the traditional form of real estate investment. (Ribbers and Kapadia 2014)
3.4. FACTORS AFFECTING REAL ESTATE INVESTMENT STRATEGIES
When analyzing the factors that affect or determine the use of different investment strategies in the real estate in the United Kingdom, the research study will use the PESTLE analysis. (See figure 3.1)
Figure 3.1 Pestle Analysis Chart (Marmol 2015)
The figure 3.1 is the pestle analysis chart that has been used to determine the factors affecting the real estate industry in the UK.
LEGAL FACTORS
The legal system in the UK has many benefits for real estate investors both local and foreign because of a clear and precise legal framework, a competitive tax regime and certainty of the law. The laws governing the real estate industry are derived from domestic legislation, common law, and the European Community law. In the United Kingdom, no restrictions are barring the acquisition of property for overseas investors; this makes the UK an attractive real estate hub. Property can either be leased, rented, or purchased for use or as an investment. During the purchase of property, there is information that is required, and this includes the buyer’s identity following the statutory law, checking of the buyer’s ability to complete the transaction, and a legal opinion from a lawyer to ensure proper documentation is done, and the sale is valid.
There are several investment structures available for acquisition and holding of real estate property in the UK. These legal structures include partnership, limited liability partnership, joint ventures, property unit trusts, and REITs. The decision on the type of structure to be used is dependent on several factors such as tax, funding, management, and exit routes applicable. There are no currency regulations and foreign exchange controls in the UK, therefore, no inward or outward investment regulations.
There two main legal estates that have existed in the UK since 1925. These legal estates are either freehold or leasehold estates. In the case of a freehold estate, the holder has absolute ownership which is unlimited in time for both the land and the property built in that land. A leasehold estate is a case where the holder has the right to use and possession but has no absolute ownership. The interest is hence created through a document called a lease which is granted for a specific period. At the end of the stipulated time in the contract, ownership of the property goes back to the owner and can only be renewed after payment of a specified amount. The real estate market in the UK is built around rental income, and most investments in the real estate industry are made within this field. For this reason, investors prefer having freehold interests in property and land.
POLITICAL FACTORS
The United Kingdom is a monarchy which is run through a parliamentary system of governance. The UK is considered to be a stable and politically fair country with attractive opportunities that make it an attractive investment destination. The public has a vast and noticeable influence on the inner operations of government making the country politically stable. The country has a proactive government which has been split into two functions. The two functions of government are the local and national administration. These positive factors act as a surety to investors, especially in the real estate market. The large volume of investments made in the real estate industry requires a politically stable nation.
ECONOMIC FACTORS
The UK has one of the most influential financial positions about other countries in Europe having the 5th highest GDP and a diverse economy which has large private and public sectors. The type of international market in the UK is the free market leading to an increase in direct foreign investment. Investors feel safe when committing large amounts of capital in real estate projects and are assured of a good return on investment. During the economic recession in 2008 and 2009, the United Kingdom was able to recover, and the real estate industry thrived with rental income contributing the highest percentage of real estate income. (Evans 2004)
SOCIAL FACTORS
Social factors affecting the real estate market in the UK are an essential factor in this Pestle Analysis. The high standards are a vital determinant for any investor willing to commit their resources. The United Kingdom is densely populated with a population of about 64.1 million. This population is concentrated in major towns and cities such as London hence the high demand for apartments and residential rental units. The need for office space is also in tall order because most of the people are working.
When carrying out major real estate projects, there is an available large and cheap workforce. The country has opened up to migration hence the growth of a cosmopolitan environment. The cost of a development project will be low because of competitive labor costs thus any investor can comfortably implement plans without incurring high overhead costs. The standards of living in the UK especially in London is high. This translates to high rent rates being paid by tenants and high rental income to landlords. The investors who develop apartments and other residential units are assured of a return on investment within a short period.
TECHNOLOGICAL FACTORS
The United Kingdom is considered to be a more economically and technologically developed country with good access to recent technology. The quality of innovation skills is high with a high population of experts in the field of science and Information Technology. Because of the broad community of experts in IT and science, the level of internal competition is high which stimulates growth. The real estate market can make use of the experts to incorporate technology into the projects being undertaken.
ENVIRONMENTAL FACTORS
There is a favourable business environment for investors in the UK. The country boasts of massive infrastructure which includes a good network of roads and high investment in the public transit. The excellent road network and efficient public transportation increase the overall value of property in the country making the real estate industry an attractive investment destination.
4. METHODOLOGY
This research about the real estate market in the United Kingdom uses the research onion as the primary navigator for the research process. (See figure 4.1)
Figure 4.1 Research Onion (Sources from Saunder, M., Lewis, P. 2012)
The research onion illustrates the stages that will be covered in the development of the research strategy. A detailed description of the research study process is provided for by each layer in the research onion. When formulating an effective research methodology, the researcher has to understand each stage and process involved in the research. (Goddard and Melville 2011)
4.1. RESEARCH PHILOSOPHY
This research study employs an interpretivist research philosophy with axiology. This research philosophy uses social elements that help in understanding what investors in the real estate industry in the UK who are involved in different types of projects consider valuable and of importance, identify the challenges being faced by investors both local and foreign and the areas that need improvement. The main advantage associated with interpretivist research philosophy is the subjective nature of this research approach. The primary data collected in the course of this research study using this philosophy cannot be generalized because the data is as a result of personal views from the investors and players in the real estate industry in the UK. The primary data collected through the interpretivist research philosophy has a high validity level and is considered, to be honest, and trustworthy. The philosophy will be important in understanding the real estate market in the United Kingdom, understanding the challenges being faced by investors and the business environment in the UK.
4.2. RESEARCH APPROACH
There are two approaches involved in a research study, the deductive approach and the inductive approach. Using the inductive approach, the focus will move from the specific players to the general players in the industry. The observations made during the research period will act as the starting point for the research, and this will be derived from the patterns and trends obtained from the data collected. The theories obtained by stakeholders in the industry will act as the foundation of the research which will analyse the collected data and try to extend the theories and also aim at discovering other ways of improving the market and creating a conducive investment environment and increase the rate of implementation of new projects in the real estate market.
4.3. RESEARCH STRATEGY
The primary research data findings are derived from the data collected within three real estate and three investment companies in the United Kingdom. The companies are IPE Developments, Cadogan Group Limited and Great Capital Partnership. The investment companies include Allianz Technology, F&C Global Smaller Companies, and Finsbury Growth & Income. Use of several companies to build the theory means that the data obtained is useful and very valuable when tackling the research question. The research strategy used in this study is a case study since the companies are treated as single units to establish the key features of the investment portfolio and draw generalization. This strategy is effective when comparing the effects of investing in the real estate market by the different real estate and investment companies.
4.4. CHOICES
The choices that have been outlined in the research onion are the mono-method, mixed method, and multi-method. The method to be used in this research study is the mixed method that requires the use of both qualitative and quantitative research methodology. Although both methods will be applied, the study will focus on the qualitative methodology to create a single dataset. The qualitative methodology acts as an exploratory study which enables the study to assess and identify the success of several real estate investments and identify the barriers and the areas of improvement within the industry. This methodology gives the researcher the opportunity to look into investing in the real estate industry in the UK from a practical perspective.
4.5. TIME HORIZON AND RESOURCES
The time horizon is the time frame within which collection of the research study data is to be completed. There are two types of time horizons applicable, the cross-sectional time horizon and the longitudinal time horizon. The cross-sectional time horizon already has an established time framework and the longitudinal time horizon involves the collection of research data over an extended timeframe repeatedly. This research study will use the cross-sectional time horizon which limits the study to the understanding of change implementation development process over a period and the effect of these changes to the real estate investment process. Even though there might have been a few changes to the replies given by the interviewees, the data collected will be deemed to be the latest.
The research study dissertation has been completed in four sections as specified below:
• Literature review and methodology for the final research study report
• Executive summary, introduction, discussion and conclusion
• Collection of data, analysis and research findings
• Preparation of the final report with emphasis to correct use of academic language, requirements, coherence, and proofreading.
TASK
TIME SET IN WEEKS
1
2
3
4
5
6
7
8
9
10
Start observing and formulating a research topic
Start forming and creating a detailed structure for each chapter
The first section of dissertation
Form interview questions based on previous research
Find observation opportunity
Meeting with supervisor
The second section of dissertation
The third section of dissertation
The fourth section of dissertation
Submit final dissertation research
Table 4.1: Gantt Chart
The resources needed for the completion of this research study report are indirect as the primary resource required is time and the rest are not significant resources. Data collection is mainly electronic via search engines and emails which are easily accessible. The time required is ten weeks for the completion of the study.
4.6. TECHNIQUE AND PROCEDURE
The focus of the primary data collected from the research study will be qualitative, and it will be obtained through a semi-structured interview through telephone with a selected employee from the three real estate and three investment companies. The interview questions will be open-ended and standardized and will have a basis on the outlined research objectives. The open-ended structure enables respondents to be honest when sharing their experience in the real estate industry in the UK without the effect and interference of the interviewer. The recording of the responses is automatic hence deduction of trends and patterns from the available data is easier and more effective. Other than the interview, academic literature will be used for secondary research to act as the foundation and understanding of the investment process in the real estate industry. The use of academic literature will help in giving more focus to the research topic. (Beiske 2007)
To ensure the reliability and validity of data collected, the participants are informed beforehand about the research study and the objectives of the research. The open-ended interview questions guarantee that the responses are not biased hence giving
