A consistent approach to an attractive sector

We have long advocated the attraction of a secure income stream and smaller properties:

  • In December 2012 we sent out a property bulletin advocating HMOs (House in Multiple Occupation) which produce high rental returns
  • In May 2014 our property bulletin highlighted the demand for smaller centrally located properties and the value they offered compared to regional homes

Our long standing view is that the security and level of rental income should be of paramount importance to investors.  This is often over-looked by investors who focus almost exclusively on capital growth.  Both HMOs and studio units offer excellent rental returns and investors do not have to forsake capital growth simply because they want to maximize their ongoing income.
A typical HMO is a house which has been configured to provide individual rooms, which may or may not have en-suites, and which have shared communal facilities such as kitchens and lounges.  The prime advantage of a HMO is the increased rental return, which can be anything up to double that received from a standard home.   Importantly, the right house can easily be reconfigured back to a family home at nominal cost so at resale you can appeal to both investors and owner-occupiers.

A common perception among investors is that HMOs have lower quality tenants and they require a lot more work if they are to be managed effectively.   This is not necessarily the case as much depends on the individual property and the choice of tenants.  The right property manager will vet prospective tenants and minimize ongoing costs so that the rental return is maximized.   The owner should be no more involved than he would be for a standard home.  Remember though, you need to buy the whole property (whether it is four bedrooms or forty) and not individual rooms.

Twenty years ago (yes, we have been operating our business that long) studios and one bedroom apartments were not particularly popular with investors and tenants.  Over the years, as house prices have increased and demographics have changed, we have seen a noticeable change.   In virtually every city in the UK there is good rental demand for smaller properties from young people leaving home, students, professionals, divorcees etc.  People increasingly want to live close to their employment, shops and other amenities and are prepared to sacrifice space for convenience and affordability.  People need somewhere to live and with the ongoing shortage and limited number of new homes being built demand for self contained studio units and individual rooms in shared accommodation will continue to grow.  This means enhanced income streams and sound capital growth for astute investors who own such properties.


Growth returns to the USA market

In February of last year we released two Property Bulletins and it is worth reviewing them in the light of what is happening in the USA market.

Property Bulletin – 4/2012
US market regains its lustre

Florida: The state where the US housing slump started now shows the best potential, analysts say
Jobs are coming back and home prices are stabilising. America looks like a land of opportunity

Property Bulletin – 5/2012
Warren Buffet : I’d buy up a couple hundred thousand single family homes if I could

The point we stressed was that when people like Warren Buffet are saying now is the time to invest it is time to sit up and take notice. All markets recover in time and some recover quicker than others. The USA is a prime example of this. Not everyone agreed that it was time to enter the market though, and one person even questioned our sanity (humorously, we think).

Well, Mr Buffet was right and last year would have been a great time to enter the USA property market. It has certainly started recovering and prices have risen by 10% over the past year. The graph below from Case – Shiller shows the performance over the past 25 years. All 20 cities have just shown increases on an annual basis for at least three consecutive months. Atlanta, Detroit, Las Vegas, Los Angeles, Miami, Minneapolis, Phoenix, Portland, San Diego, San Francisco, Seattle and Tampa all posted double-digit annual returns.

The good news keeps coming – a recent report from CoreLogic showed there were 9.7 million properties underwater (whose owners owed more on the mortgage than the homes were worth) during the last quarter. This was down from 10.5 million in the previous three months. That amounts to 19.8 percent of all properties with a mortgage, down from 21.7 percent. In the past year, 1.7 million borrowers have regained positive equity. “We are still far below peak home price levels,” CoreLogic Chief Executive Officer Anand Nallathambi said in a statement, “but tight supplies in many areas coupled with continued demand for single family homes should help us close the gap.”

As you would expect in a market the size of the USA, the recovery is quite fragmented. Nevada had the highest percentage of properties in negative equity at 45.4 percent. Rounding out the top five were Florida, Michigan, Arizona and Georgia. These five states combined accounted for 32.8 percent of negative equity in the United States. These are the markets astute investors should target.

So why didn’t more overseas investors enter the USA market last year? Lack of familiarity with the market there is the reason most often cited. Investors in Hong Kong, Singapore and Malaysia are much more familiar with the London market and many are reluctant to go outside their comfort zone. The important thing to remember is that if you have the right adviser, investing in the USA can be a trouble-free and profitable exercise. A lack of knowledge and familiarity should not deter you. The right adviser will handle all aspects of the purchase process, ongoing letting and management and eventual resale of the property. The USA is a sophisticated market and the level of professionalism and service in the property sector is second to none. In addition to this, we have had over 20 years experience in serving the needs of international property investors.

Whether it is a freehold house, condo or development land, the USA is the place to invest at the moment. When you can buy land through a company with a hugely successful track record from as low as US$10,000 or a Tampa freehold house in a marina development close to shops etc for under US$250,000 there is no downside.

HMO Ealing

House in Multiple Occupation – a sound property investment

A niche property investment sector in the UK that is often overlooked by investors is the HMO.

A typical HMO comprises between five and twenty individually tenanted rooms. It is usually a large house which has been converted for the purpose. It will have one or more shared kitchens and may have shared bathrooms and lounges. Whilst rooms with en-suites are popular, these are not essential as there is good rental demand from more budget conscious tenants who are happy to sharea bathroom.

On April 6th 2006 mandatory HMO licensing came into force across England. The intention was to raise the standard of accommodation in HMOs. HMOs need to be registered with the local council, which will assess whether the property meets the requirements to be a HMO and whether in its view there is enough space for the occupants and the property is well managed.

Some investors may be concerned about the quality of tenant, but as with any property if the right letting and management agent is used there should be few problems for the landlord. Tenants vary from professionals seeking a room in London to stay in for several days a week through to construction workers and students. Rents in London are extremely high by general UK standards and accordingly tenants are prepared to live in smaller spaces if they offer convenience and are reasonably priced. The good news for HMO owners is that rents are unlikely to fall going forward. Demand is set to grow for relatively low budget accommodation and this will produce even better returns for owners.

Whilst few overseas owners have entered this sector, HMOs are popular in the UK. The major attraction for investors is that they provide a higher income stream than traditional buy to let properties. An income of 5% – 6% net of all costs is available with some London HMOs. With typical apartments only receiving this as a gross figure at best, it is easy to see the attraction.

Prices for good quality properties vary according to size and location. A smaller HMO in a decent area might start at GBP400,000 and some larger properties will cost in excess of GBP2m. Buying an established property and converting it to a HMO is an attractive proposition which will increase the return to the investor. However, professional assistance is recommended if this is to be done successfully.

For investors seeking an attractive income stream, a HMO may be a sound investment. For further information on this sector please contact us.


USA single family homes – major funds continue to enter this property investment sector

Many property investors are concerned over whether the single family home sector in the USA is one they should invest in. Well, in addition to Warren Buffett extolling its virtues (see our web site news archive), investors can take heart from the news that Blackstone Group has apparently become the biggest U.S. investor in single-family rental homes by spending more than $1 billion since the start of 2012 to acquire more than 6,500 foreclosed houses in eight metropolitan areas.

News reports indicate that numerous private-equity firms have crowded into the business, some as early as last year, looking for a way to bet on the recovery of the housing market. Blackstone’s growing commitment to this strategy offers fresh evidence that the purchases of foreclosed homes, which began as a mom-and-pop pursuit, is gaining legitimacy among the biggest private-equity firms. The demand from these firms and other investors could help strengthen the housing recovery, analysts say. Earlier this year, the Federal Reserve expressed support for the strategy as a way to clear the backlog of foreclosures that has weighed down the market.

People involved in the market estimate that private-equity firms and other investors have raised $6 billion to $8 billion to invest in the sector, as they try to take advantage of prices that have fallen nationwide on average by more than a third. That could buy 40,000 to 80,000 properties, according to a recent report from Keefe Bruyette & Woods.

Blackstone and other firms are expanding rapidly partly because the housing market is firming up. In some markets, home prices have risen to the point that firms might not be able to achieve their initial return objectives from renting them out.

“I believe the smart thing to do is to ramp up really quickly, because I think the dynamics are going to change dramatically in the next 12 months,” said John Burns, an Irvine, Calif.-based housing consultant. “We’re going to see a lot of price appreciation at the low end of the market, which means lower cash yields.”

Blackstone has previously said it expects to achieve initial yields of 6% to 7% on the rental income. But the firm also will need rents and home values to rise if it is going to hit the double-digit returns that it typically promises its investors.

Private-equity firms also are looking to boost their property investment returns by putting leverage on their portfolios. Blackstone is close to finalizing a loan from Deutsche Bank for $300 million, an amount that could expand to as much as $600 million, reports indicate. The loan is the largest made to a private-equity fund for this strategy so far, executives at several firms say.

A $25 million fund raised by Delavaco Properties Inc., a Fort Lauderdale, Florida-based owner of about 450 single-family properties, was “more than two times over-subscribed” with investors drawn to the 7.5 percent interest on the debt plus options to buy shares of the company. Another party, The Alaska Fund, expects unlevered returns on its investment of 6 percent to 7 percent a year.

The expected yield from this sector, while better than Treasury bonds, is an indication that the single-family rental market’s risk is lower — and so are potential rewards — than the usual draw for opportunistic investors, said Steve Duffy, managing director of real estate investment banking at accounting firm Moss Adams Capital LLC.“It’s logical that early capital had the view to get a higher return from their investments,” Duffy said. “That’s no longer the case. The risk is down because the economy is recovering and there’s stabilization in housing.”

The flow of discounted foreclosures has certainly slowed since late 2010, when some of the largest mortgage servicers, including Bank of America, imposed a temporary moratorium on home seizures amid allegations they used faulty or forged paperwork to seize properties from delinquent borrowers. Even after a $25 billion settlement in February between the five largest loan servicers and attorneys general from 49 states, foreclosure processing hasn’t recovered. Banks repossessed 185,451 homes in the first quarter, a 14 percent decline from a year earlier, RealtyTrac data show. The number of REOs bought by third parties in the first quarter was 123,778, down 15 percent from a year earlier, according to the Irvine, California based company.

With its low risk appeal, the USA single family home property investment sector has all the ingredients to appeal to property investors.

Poinciana 2

Poinciana, Florida – a great place to live and invest in

As our clients will know, we are firm believers in the freehold house market in Orlando, Florida. Quality 3/4 bedroom homes with tenants in place and net rental yields of 4% plus p.a. can now be bought from under US$100,000. Poinciana is a quality residential area that offers a wonderful lifestyle for its residents. You can find out all about it by visiting;

It is worth taking a few minutes of your time to look at what Poinciana has to offer. You will quickly see why we are firm advocates of the area and the homes on offer.


Freehold houses in central London

I am in London over Chinese New Year talking to agents etc about the state of the residential sector. The one recurring theme is that there is a shortage of quality properties on the market. Heavy demand from overseas, and a little surprisingly, UK buyers means that well priced properties are selling quickly. Houses in particular seem very popular, especially in prime areas such as Chelsea. The investment bankers may have had their bonuses cut, but they still seem able to house their families in the style they have become accustomed to. Newly refurbished properties are particularly popular as people don’t seem to want to go through the building phase – they want to move in straight away and will pay a premium for the privilege of doing so.

Most investors focus on apartments in zones 1 and 2, but the acute shortage of freehold houses in these areas augers well for this niche sector going forward. Of course, the investment level for a house in Chelsea deters most investors from buying one. Prices start from GBP3m and head rapidly north from there. Importantly, that doesn’t seem to deter the investment banker or overseas national who wants a prime property with a small garden and a feeling of space from buying.

Whilst a number of new apartment developments will come on the market in the next few years, they are not building freehold houses. Prices for this type of property will continue to rise over the next several years.

Tony Davies
Managing Director