The answer to the above question seems obvious – most investors want both. Whilst it is possible to achieve this in some emerging markets, such opportunities come with high risk. The currency, political stability, ownership entitlement, re-sale potential are all issues that affect the medium viability of emerging markets. Most investors we speak to are seeking security of their capital with an attractive return. That means a lower risk strategy and mature but profitable markets like the UK are seen as preferable for this.
So can you enjoy both in the UK? The answer is no, you can’t if you want to minimise your risk. In the UK investors nee to clearly define whether they want a high income with capital growth that matches inflation or higher capital growth with income that typically is adequate to service a mortgage. If the marketing agent forecasts both, be wary – if it sounds too good to be true it probably is.
Whether you are an experienced property investor or just starting the process of putting together your portfolio, your aim should be to have a diversified portfolio. This can be achieved through exposure to different currencies, locations and sectors. Many investors are totally focused on capital growth (based on market vales rising), but there is a lot to be said to having an attractive and secure and attractive income stream as part of the portfolio. Property prices may go up over a period of time, but seeing money go into your bank account every month never loses its appeal.
Many investors we meet are heavily exposed to one capital growth market, often London property. This market has performed exceptionally well for many years and will continue to do so. A typical example of a well located capital growth opportunity is our Redmans Place, London E1 project. The apartments will rent easily to people working in the city and Canary Wharf and given its location and quality capital growth should be strong. With two bedroom units at GBP470,000 most investors will secure a mortgage. With gross rental yields of 4.5% – 5% gross (typical on zone one and two properties on current market prices) the net income will be negligible. This may be acceptable if the emphasis is on capital growth, but they are no ideal for investors who want an attractive income stream paid to them every month.
The alternative strategy to capital growth is to focus on income. In the UK you can buy cheap houses in many northern towns and put welfare recipients or immigrants in as occupants. This does not necessarily mean you will have a poor quality tenant, but it does mean you will not have a quality property in a quality area. Welfare recipient etc. rent in the bottom of the sector. Your re-sale potential may also be limited in such locations as people typically aspire to own property in better areas. Whilst your gross rental yield may appear to be attractive, after you take into account repairs and maintenance, voids etc. (let alone the management headache) the net yield may not be so.
For investors seeking a higher income opportunity, studio apartments may offer an affordable option. These can be targeted at the student or the general professional market. There is a general trend in the UK to downsizing in terms of residential property. People are prepared to give up extra space as they search for convenience and affordability. Studio apartments in city centres that appeal to professionals who want to be in the heart of everything make great rental investments. A studio unit in Redmans Court is an obvious example, but the income stream is still going to be less than a strategically located purpose built student accommodation studio unit which offer a much higher income stream.
Are there any downsides to buying a studio to be used by students? Of course, there is. Few, if any, investments are perfect. You have to be a student so you won’t be able to live in it yourself. The upside is that this is is seen as a plus as they offer much better security and hence appeal to students. There is no shortage of students and studio size units are highly sought after by post-graduate and more mature students so management issues are minimal. Another potential downside is that you won’t be able to sell it to an owner-occupier in the future. Does this matter if you sell it to another investor looking for a high income opportunity (and there is an increasing number of investors looking for that)? A great example of such an opportunity is our Majestic Court development where large studios can be bought from GBP49,950 and have a guaranteed tenant in place for five years at 8% per annum net of all costs.
Income or capital growth? As you can gather from the above, each has it merits and much depends on the individual investor. The first step is to sit down with the right property adviser (and no disrespect to most Independent Financial Advisers, we do mean a specialist property adviser) and discuss your needs and requirements. It is worth taking the time and effort to get the right advice at the outset. Having done that, the property world awaits you and there are some great opportunities for you to take advantage of.