UK Residential Investment :
The UK residential market has lived through some extremely turbulent times over the last four years. Overall, prices are down less than 10% from peak although this varies substantially by location with some parts of London being at new highs and some employment-challenged areas continuing to fall. Overall however, sensible buy to let investors that have invested in sound locations with tenants in good jobs and with good employment prospects have done very well with rental income growth and not suffered too badly in capital values.
Overall, in 2012 we expect investment in good locations to continue to offer very good returns with gross yields around 8% or so. As a company, we are seeing substantial inflows of new investors who are not experienced in buy to let property investment but have observed the sector's resilience and inflating rental incomes and are attracted to find a new home for their substantial bank cash deposits. Buy to let investors purchasing in good areas should see some positive growth next year in pricing as well as getting rental growth of around 5%. It is important to point out that a rental growth of 5% supports a price increase of 5% provided the yield percentage remains the same. It is also important to note that over the last two years the rental yield percentage that was acceptable to buy to let investors has been gradually falling. The result of this is that investor pricing has been rising for the last two years regardless of house price indices recording high street sales prices being relatively stagnant. Vendors are getting less distressed. We continue to negotiate hard on pricing for our buyers but clearly prices have been rising for the last two years or so and we expect this to continue in line with rental growth and a firming of the buy to let market as a whole.
The shortage of UK housing stock in good locations will remain for at least a decade if not for ever given the lack of building going on and the enormous shortfall that we already have. For this reason, combined with the lack of mortgage finance for homebuyers, we expect rents to continue to be pressured upwards for the foreseeable future.
Overall, we strongly recommend cautious UK investors to redeploy capital into the UK buy to let market away from equities that have not risen for around 15 years in the UK and that offer little hope of growth in the next decade given the very limited GDP growth expected.
London should be chosen where the possibility of short and medium-term capital growth is the most important factor for the investor whereas strong regional locations outside of London should be chosen by investors seeking stronger rental yields (7-10%) and long-term capital growth potential.
The student accommodation sector will also continue to benefit from excess demand over supply even after the new student fee structures have been now taken into consideration. It is important to be careful of weaker universities and a handful of towns have more balanced supply and demand already but on the whole the sector is extremely attractive when purchasing whole apartments or blocks. We remain very cautious on individual bedroom ‘investments’ that have been seen in the marketplace recently.
As far as UK commercial property is concerned our advice is to steer well clear given that the economic turbulence has affected the commercial marketplace far worse than the residential market and has resulted in 50% price drops for commercial property and commercial funds in many cases.
Overseas Property Investment :
it is very important to differentiate between investment and speculation when it comes to overseas property, even more so than when investing in the UK market where the undersupply is well understood and creates relatively safe market. Speculation is when someone purchases a property and just hopes that it goes up in value whilst enjoying limited or non-existent rental income. Investment is when a property is purchased that yields strong and reliable cash flow with the potential for capital growth in due course as a secondary matter. Some overseas markets offer great investment potential and some offer speculative opportunities, we prefer to focus on the investments.
Markets that have significant supply excesses such as Spain are a speculative environment where a property purchase may be at what is perceived to be a good price relative to recent peaks but rental income is likely to be limited where there is very substantial excess of supply. Around 1 million homes have been built but remain unsold in Spain meaning that the excess rental supply is likely to remain for a very long time even after these properties are sold. It is important to be careful of banks selling properties themselves which are the subject of foreclosures as it is quite normal practice for them to offer very substantial mortgages on these properties to new buyers, as much as 100%. The valuation of the property can be very questionable given the conflict-of-interest for the bank giving the mortgage and selling the property. There are some excellent opportunities but buyer beware.
Dubai is an interesting market where construction activity collapsed back to near zero in the recession but recently 24 hours per day construction has restarted on a few sites in quality locations. There are supply shortages of high quality apartments in completed communities that are attractive to local residents and prices have begun to rise again as well as rents coming under substantial pressure over the last 12 months. Adventurous investors may wish to look at this market but will need to visit to gain local knowledge or deal with a good agent if they do not entirely trust leaving the outcome of their investments to a local agent they have not used before.
There are also very interesting things happening in the USA where there are substantial numbers of foreclosed properties due to the ease with which homeowners can walk away from their mortgages. This has led to substantial price drops and yet rental yields are very strong due to the huge rental demand and homeownership going from 70% to 60% in just a few years. Again this is a market for the slightly more adventurous and experienced investor as we have seen some problems with the quality of property, the quality of locations, the safety of the legal process, the quality of the management companies and the quality of sales agents representing the developers in the UK. Getting a 9% to 15% net yield is entirely possible in the USA following the large price falls, for example a 60% reduction in Atlanta with 2,500 sq ft, 4 bedroom homes at $80k in good areas.
Europe has its own challenges with the credit crunch and, Spain aside, many other European countries are now seeing substantial reductions in the number of mortgages available and the amount of mortgage finance allocated by banks. We expect this to continue for many years in Europe and the end result is that loan to values will be much reduced from what people were used to in Europe and prices will be under downward pressure for some considerable time in most European countries other than Germany. Nonetheless this will create great buying opportunities for holiday home buyers but investors will need to pay close attention to rental demand and yields on buy to let or holiday rental property.
Whilst the main economic challenge to Europe was ‘just’ struggling with recession we held the view that the euro was likely to become substantially weaker over time. We still hold this view whilst Europe continues to hold together but if the European union seriously begins to fall apart than the most likely outcome is that the southern ‘Club Med’ countries like Portugal and Greece will leave and devalue the currency whilst the remaining ‘Nordic’ countries will find themselves part of a euro currency that could well be stronger rather than weaker given the weak countries have been ejected.
Forecasting the euro rate whilst Europe is in turmoil is getting somewhat difficult as it could go either way making property purchases and European mortgages more risky than they were. One example would be Greece where making a purchase now may seem a good idea given the pressure the country is under but our view is that Greece will leave Europe after the French and German elections in around one and a half years time. The currency would then devalue by around 60% completely decimating any investment that was made into the country. Bear in mind that the Greeks are all trying to get their money out of the country now so purchasing a property in Greece today would seem rather foolhardy given what the locals know and just because a modest reduction is available today compared to a few years ago does not mean that that is the bottom of the market. Avoid Greece at all costs and consider selling any property that you currently own there.
The rule of thumb remains that safer investments are where substantial rental demand still exists and very limited new supply is forecast. There are not an abundance of these locations but London is currently one of them and we have also started to develop a tourist resort in Cape Verde, Santa Monica Beach Resort and Spa ( www.santa-monica-resort.com ), due to the rapidly rising tourist numbers and the almost non-existent property development on the islands.
True investments are out there, you just need to find them with careful research. You also need to make sure you are a true investor, not a speculator, as strong rental income will protect the value of your investment as it has done, for example, in the UK over the last few years.
This news story has come from the property investment blog by Stuart Law, CEO Assetz plc.
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