Should You Invest in Luxury or Affordable Housing in the UK?

Investing in luxury property sounds like an ideal investment choice, but how does it compare to investing in affordable housing? Is luxury property a waste of money, or is investing in affordable property a false economy? Join me, Liam J Ryan, as I look into luxury vs affordable housing as an investment opportunity, and the pros and cons of both choices.

Table of Contents

What is Luxury Housing?

Luxury properties boast a range of high-end features such as a prime location, stunning views of the surrounding area, unique design choices, and luxurious facilities like built-in swimming pools, wine cellars, car lifts, chef’s kitchens and more. Luxury property can be located within a city for convenience and access to fine dining and shopping, or in more rural areas, allowing the owners or tenants to enjoy the countryside views and some peace and quiet. Luxury housing is often built by specialist development companies or by private homeowners.

What is Affordable Housing?

The definition of affordable housing can vary, but usually, it refers to homes that fulfil a need for housing that is not currently being addressed. The government often provides affordable housing in the form of social rent homes managed by registered providers like housing associations, or via schemes such as shared ownership or grants for first-time buyers. Affordable housing is planned by local authorities and built by housing associations and private developers.

Benefits and Drawbacks of Both

Potential Benefits of Luxury Housing

High rental yields. Luxury rental properties can command high rental yields thanks to exclusivity and high demand for the most upscale properties available.

Capital appreciation. As demand for prime real estate continues to grow, investors stand to benefit from capital appreciation on their investments over time.

Attracting affluent tenants. High earners demand upscale rental accommodation and are prepared to pay premium prices for it, offering strong returns for investors.

Potential Drawbacks of Luxury Housing

High barrier to entry. Luxury homes have a much higher price point than other types of property and can sell for £1 million or even more, requiring a higher initial investment.

High maintenance costs. Tenants and buyers of luxury housing expect a very high standard of maintenance on the property, which can cut into investment profits.

Harder to find buyers or tenants. Just as luxury housing is exclusive, so is the market it serves. Most people are not interested in buying or renting a luxury house or flat, especially in areas where employment and wages are low.

Potential Benefits of Affordable Housing

Steady rental demand. There is an immediate need for affordable housing in the UK, which ensures a reliable stream of long-term leases and potential buyers.

Lower entry and maintenance costs. Affordable housing has a much lower initial investment requirement compared to luxury housing, making it ideal for beginner investors or those with limited capital.

Potential for subsidies and government incentives. If you invest in the creation of affordable housing, you can be eligible for government-funded subsidies and grants, lowering initial investment costs.

Potential Drawbacks of Affordable Housing

Lower rental yields. Rental yields on affordable housing, although steady thanks to high demand, will simply not be as high as rental yields on luxury housing.

Limited location choices. Potential property investors may not be able to invest in affordable housing in their desired location due to the proximity to schools, employment centres and other amenities.

Slower capital appreciation. Affordable housing may not be appreciated as quickly as investors would like, especially if it is a newer build in a less-than-affluent location.

While there are pros and cons to both affordable housing and luxury properties, some investors choose to invest in both to diversify their portfolio to make it more resilient against market fluctuations and changes in the local economy.

Potential ROI on Luxury and Affordable Housing

Market Demand and Supply

There is a high market demand for both luxury and affordable housing, although they have different demographics. High net-worth individuals, international buyers and corporate executives seek luxury housing whereas affordable housing sees strong demand from the wider population. Both types of property are in short supply, but for different reasons – luxury property due to scarcity of prime locations, whereas affordable housing supply is constrained by zoning laws, planning permission and lack of public investment.

Economic Conditions

International economic conditions, currency exchange rates, and global financial markets can significantly impact the luxury housing market, especially in cities like London that attract foreign investors. Conversely, affordable housing tends to be more resilient during economic downturns as the demand remains relatively stable. People still need somewhere to live, and there may be increased demand from those downsizing or unable to afford more expensive homes.

Government Policies

Luxury property investments can be affected by government policies like higher property taxes, stamp duty, and restrictions on foreign buyers. Occasionally, there can be incentives for restoring or maintaining historic properties, although these are rare. As for affordable housing, government incentives can improve the viability of investing in affordable housing such as subsidies, tax breaks, and grants.

Future Predictions for Luxury and Affordable Housing ROI

The market for luxury accommodation is robust and reports show that it is likely to remain so with an annual return of 8.5% to 9.2% between 2024 and 2028. Over the next 5 years, London luxury properties are expected to increase in price by up to 13.9%. As for affordable housing, some have predicted a drop in house prices although this is likely to be modest and temporary, and overall prices will continue to rise. A reduction in the interest rate for mortgages and the creation of more government-funded affordable housing and help-to-buy schemes could result in more homebuyers, potentially reducing rental yields, although some predict rental prices will rise by 3 – 4% between now and 2026.

Choosing Your Investment Strategy

Whether you choose to invest in luxury property, affordable housing or a combination of both, the right choice depends on understanding all potential pros and cons, key factors that influence the ROI of each, and how that fits with your own financial situation and investment goals. I always recommend doing thorough research into the type of property you want to invest in, the location, current trends, and more before making a decision.

Are you interested in finding out more about property investment in the UK? Join me, Liam J Ryan, and other property investment gurus at one of Assets For Life’s FREE property investment events – click here to find out more or sign up.