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Brexit

The UK and Brexit – a damp squib for the property market?

 At the time of the Brexit vote we commented that it would be the end of the year before there was an indication of its effect on property prices. The good news is that forecasts of the UK’s house price boom coming to an end have proved largely unfounded.  Ultra-low mortgage rates, record high employment and a lack of housing stock keep prices moving upwards. Figures compiled by the Office for National Statistics and the Land Registry for November show an annual increase of 6.7% and a jump of £2,000 from October. In England prices rose by 7.2%, but Wales and Scotland lagged behind with growth of 4.1% and 3.3% respectively.

The fall in the value of the pound has certainly helped to attract foreign buyers back into central London after they were put off by high stamp duty rates. House prices in London rose by 1.8 per cent on a monthly basis in November, reversing the 1.2 per cent drop in the previous month and undoing the dip in prices of £8,000 between July and October.  Nevertheless, annual house price growth is beginning to slow as property prices begin to reach a peak of affordability for many buyers. The average house price in London still remains significantly higher than anywhere else, however, reaching £482,000 in November, compared with £313,000 in the southeast and  £127,000 in the northeast.

However, while trends in house price growth have barely changed since the Brexit vote, the number of housing sales has slumped. There was a 22 per cent drop in property transactions in England during September compared with last year, according to the latest data available. Estate agents have reported a sharp fall in transactions as homeowners consider it too expensive to trade up owing to stamp duty costs or wait to see what happens to the economy. The number of buy-to-let investors is also falling amid the extra 3 per cent stamp duty surcharge on second homes. This is particularly evident in London where the number of completions in London fell by 39.5 per cent to 6,698, compared with 11,065 in September 2015.

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Is Brexit an opportunity? For some it is, for some it isn’t

The Brexit result took most commentators and analysts by surprise and, we must admit, us as well.   The bookmakers were expecting the Remain campaign to prevail, but the underlying discontent over issues such as immigration resulted in a vote that is going to impact the socio-economic structure of the UK in many ways.  Does this mean there is an opportunity for overseas property investors?   Some of the leading estate agents came out with headlines suggesting that the fall in Sterling meant people should rush in and buy now.  Most investors are far too cautious to follow that advice.  We believe that patience in the short term is certainly a virtue, although hesitancy can result in missed opportunities.

It is fair to say that price growth had already stalled in most parts of London and the exhibitions held in Asia were seeing far fewer sales than in 2015.  Developers had pushed property prices too far and the market needed to take a breather, before, most people assumed, it surged forward again.  Fortunately or unfortunately (depending on whether you are potential home buyer or an investor) the upward trend in prices is over for a while.  Few are predicting a collapse in price and we agree with the consensus that stagnation or a mild correction is likely.

Going forward, interest rates should remain low as the government tries to keep the economy ticking along, but whether mortgages are readily available at the current rates is open to debate.  Some believe that lending will be more restricted and expensive as various sectors compete for funds. They may have a valid point, which means that if you are an off-plan buyer with a purchase to complete in the next two years you may have difficulty in securing a mortgage.   We expect a large number of such properties in central London to come on the market which would force prices down.  If you are an off-plan investor, our advice is to consider your completion strategy sooner rather than later.  If there is a stampede for the limited finance that is available, you don’t want to be at the back of herd.

Rental demand in London is likely to fall as some institutions move their operations elsewhere.  In most cases this simply means there will only be three applicants for every property instead of the current five.  Given the ongoing shortage and the sheer number of people looking for accommodation, particularly affordable accommodation, an appreciable fall in rental yields is not going to happen.  However, we can certainly rule out rental increases in the short term.

As for the rest of the UK, the warnings of dramatic house price falls from Remain campaigners should not come to pass.  The market is fuelled by domestic, not international demand and buyers are not directly impacted by the value of Sterling.  People still need houses to live in (of which there is a huge shortage) and there is not going to be mass unemployment overnight with interest rates increasingly dramatically.  If you own a property that is rented and it is performing well, sit tight and enjoy the rental income. It will be a sound investment over the medium to long term.

Of course, opinions differ and some people will see any predictions as crystal ball gazing.   The reality is that no-one really knows what will happen over the short to medium term.  We have been operating in this market for over twenty years and are confident that over the long term prices will inevitably rise.  In the meantime there may be opportunities for astute investors to benefit.

So where are the opportunities?

Downsizing will continue and if anything, increase.  Tenants will not be inclined to pay higher rents with the uncertainty over job security in the financial sector etc. and will sacrifice space for affordability and convenience.  HMOs (House in Multiple Occupancy) and smaller properties which show secure and above average rental incomes will become even more popular.  With price growth curtailed, many investors will place greater emphasis on income streams and these properties should perform well.

Buying from semi distressed off-plan purchasers should be possible over the short term, starting sooner rather than later.  With the ability to complete such a purchase, buyers will be able to make discounted offers and acquire properties which over the medium term will be seen as ‘bargains’.

For investors trying to take advantage of a weak currency, or buy at the bottom of the market, timing is the key.  Determining when Sterling and property prices have reached their nadir will be difficult to predict.  Our advice is that if the right opportunity that meets your investment criteria comes along then take advantage of it.   Only investment gurus and clairvoyants can pick the bottom of any market.

Finally, despite pre Brexit warnings to the contrary, London will remain a major financial center and will continue to attract foreign workers and investment.   There is no need to rush in, but ‘fortune favours the brave’ so don’t sit on the sidelines too long. London property has always performed, and it will in the future if you adopt the ‘five rights of property investment’.  Buy the right property in the right location for the right price at the right time through the right adviser.

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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.

Four

‘Investors dump new flats back on market’

London’s Evening Standard newspaper is required reading for many of the city’s residents and commuters heading home and further afield.   Its articles are, in general, unbiased and objective although it is always reminding its readers what a great city they live in.  With the price of London property rapidly becoming a political issue due to many Londoners finding themselves priced out of the market, the paper has increased its coverage of the sector in recent times. An article that appeared on the 14th December will certainly have upset many of the agents that have been marketing to overseas buyers.

For most of this year there have been rumblings that the London property is looking very expensive.  In recent months sales levels have fallen and prices have stagnated.  Of course,  most agents, particularly those holding exhibitions in Asia, are not inclined to broadcast this.   Whilst the reality is that the price growth was being fueled by both domestic and international demand, once demand from overseas waned then price growth was bound to stall. The question many people are now asking is whether prices will fall.

The Evening Standard article was headed ‘Investors dump new flats back on market.‘  It comments that as many as 60,000 homes are expected to be completed in areas such as Nine Elms before the end of 2017.  With over 50% of those believed to have been sold to offshore buyers there is certainly cause for concern.    The increase in stamp duty, coming after the introduction of capital gains tax for offshore residents, has prompted many investors to step back from the market. Cluttons, a leading London agency, believe that up to 30,000 newly built apartments could be dumped on to the market as investors make a hasty retreat.  This will, according to the paper and it is hard to disagree with it, inevitably lead to falling prices.

We are certainly not trying to denigrate the London market.  We have been active in that market since 1994 and have had an office there since 1997.  If you are looking for a medium to long term capital growth property there is no better market to invest in.  However, I would not rush in and buy at the moment.  The first quarter of 2016 will give us an indication of where the market is heading and by the middle of the year there may some good buying opportunities

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Do you want high income or high capital growth from your property investment?

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.

Dashwood accom

Student accommodation funds, liquidity and the benefits of direct ownership

Many investors have entered the student accommodation sector through managed funds. Some of the funds have performed well, others such as Mansion and Brandeaux have experienced serious liquidity problems. Nevertheless, the underlying assets, i.e. the student accommodation units, have preformed well with most operators experiencing 99% occupancy rates and healthy investment returns.

When investors want to withdraw from a managed fund they expect to be able to do so and to receive their funds promptly. To facilitate this the funds typically keep up 10% of its net assets in cash. The managers argue that if more than this was kept then this would affect the fund’s investment return since cash does not generate anywhere near the return that student accommodation provides. In a normal market you would expect to see subscriptions being higher than redemptions resulting in the fund growing in size. The problem arises when there are more redemptions and the cash held (i.e. the 10%) is depleted. The manager is then forced to sell some of its assets, which brings with it a number of issues that have to be faced.

The funds typically own blocks of 200 units plus. They are extremely reluctant to sell a portion of these as the block would then lose its appeal to institutions etc who want to manage a whole block and not have to deal with individual unit owners. Some of the funds have complained that there are too few buyers for the blocks, but this has been disputed by a number of parties. There is strong demand from overseas institutions, with the flow of money from international investors, the majority of which has been from North America, passing the £1bn mark in 2013 for the second consecutive year, up from just over £275m in 2011. New funds are entering the market, including the Curlew Student Trust, which aims to raise £250m. The BlackRock UK Property Fund spent £50m and Standard Life spent £81m acquiring blocks in 2013. So much for there not being buyers for the blocks. There is always a buyer for a property, the only issue is the price that has to be paid.

Of course, once word gets out that a fund has a liquidity problem, other funds and institutions want to buy at a discount. If the block is sold at a reduced price the fund’s performance may be affected, which may cause more investors to withdraw, which will require more blocks to be sold and the problem goes on. Irrespective of this, more investors hear of the problem and start to redeem their money which create more liquidity problems.

We are not criticising funds, apart from the fee structure contained in the fine print, which is often far too high. We are simply pointing out that funds have the potential to suffer from liquidity problems, with all the adherent issues associated with that.

For buyers of individual units, the issue of liquidity does not directly affect the value of their investment in the same way it affects a fund. A fund with liquidity problems quickly becomes common knowledge, whereas the real reason why an individual buyer is selling a property is rarely known. The seller simply lists it for sale at a price and there is no expectation from a buyer that the seller is a distressed vendor.

It is true that property is generally less liquid than funds. However, if the fund is experiencing the above problem then from an investors point of view there is far less liquidity than if the investor directly owned the property. He or she is locked in and dependent on the manager to return their funds. At least with direct ownership there is always a buyer at the right price. The secondary market for student units is rapidly developing and going forward the sector will offer satisfactory liquidity and attractive returns.

Graduates in Cap and Gown

The need for 25% more university places will result in a continued shortage of UK student accommodation

There is an ongoing shortage of purpose built student accommodation in the UK and if comments made by that country’s universities minister the shortage is only going to grow. Universities in the UK have seen a squeeze on places in recent years, with thousands of students failing to get on courses. In a recent paper, Mr David Willets the minister warned that the number of places at UK universities will have to grow from 368,000 to 460,000 over the next 20 years to meet demand. If these are provided the accommodation shortage will become even more acute.

The comments and projections from Mr Willetts follow on from The Robbins report, which was written fifty years ago and called for and led to a bold expansion in university places. The report’s guiding principle was that higher education should be open to all able and qualified enough to go. The reality is that there are more applications every year than places available and that is not going to change unless the government takes action.

Mr Willets believes that due to the fall in the number of births circumstances have changed since the report was written. Educational standards have also improved with the number of young people with the potential to go to university increasing. He said “However, looking ahead to the 2020s, we can see the increase in the number of births since the turn of the century feeding through into more young people. Those pressures have already been felt in our nurseries and primary schools.”

The above does not take into account the growing number of overseas students that are coming to study in the UK. There are 435,000 at the moment and with the government and universities encouraging overseas students to come to the UK even more places will be required.

Of course, whilst there is no guarantee the government will act in time to prevent the problem from growing, the important first step of acknowledging the need for more spaces has now been taken. One option is for the government is to join forces with the private sector to establish new universities. The recent increase in tuition fees clearly indicates it believes people should pay for higher education and the increased involvement of the private sector seems inevitable.

All this means the demand for student accommodation will keep growing. Unfortunately for students, there is no likelihood that there will be enough purpose built accommodation in the foreseeable future. There are approx. 1.15m students living away from home in the UK and there are only approx. 450,000 purpose built units. This means that 700,000 students are in the private sector looking for accommodation, which is often poorly located and unsuitable.

With increasing numbers of students and restrictive planning and other issues holding back development of suitable blocks, there is going to be continued demand which will result in upward pressure on rent levels and capital values.

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UK prices forecasted to rise, a shortage of homes and yes, you can invest outside London

The bears are certainly in retreat when it comes to the UK residential sector. Bullish reports from analysts and commentators now seem to be the norm, a different picture to the last couple of years. One such report has just been released by the Centre for Economics and Business Research. It advises that the average price of a home in Britain will jump by a quarter in five years, from a national average of £225,000 this year to £278,000. In London prices will rise even higher, from £395,000 today to £566,000 in 2018. As well as the capital, the regions will also benefit, with a predicted rise in the East of 27 per cent to an average of £311,000 and a jump of £20,000 in the North East to an average price of £160,000.

The favourable news is not just limited to house prices, mortgages are becoming more available, with the number of loans handed out to buy a home, rather than just to remortgage an existing loan, rocketing according to the Bank of England. In August, 62,226 house purchase loans were handed out, the largest number since February 2008 and a 30 per cent increase on August last year.

However, house prices rising over the medium is not good news for everyone. Many people are warning that a generation of young people are being frozen off the property ladder by the crippling cost of homeownership at a time when the average full-time salary is £26,500. Many people believe the answer lies in building more homes, but this clearly not happening. The Joseph Rowntree Foundation (JRF) advises that there will be a shortage of more than one million homes by 2022. According to JRF the impending housing crisis will hit hardest in London and the South. Although these regions contribute 70 per cent of the rising demand for new homes, only 50 per cent of new homes are currently being built there. Lord Best, Director of the Joseph Rowntree Foundation said: “We estimate that the difference between housing demand and supply will have widened into a yawning gap of 1.1 million homes in England alone by 2022: most of it in London and the South East. This genuinely shocking statistic shows why the time has come for policy makers to recognise that a plentiful supply of new and affordable homes is of the greatest importance the nation’s future health and prosperity.”

Demand for extra homes in England is now estimated at around 210,000 properties a year, compared with average output from housebuilders and social housing providers of 154,000 extra homes a year over the past five years. The accumulating gap between demand and output points to a shortfall of 1.1 million homes in 20 years’ time. Although all regions are expected to see growth in the number of households, JRF notes that the greatest pressure will continue to be felt in southern England. Lord Best said: “In our view, housing shortages are set to become one of the most significant social issues of the next 20 years. Unless we act now, shortages will lead to overcrowding and homelessness. But they will also have knock-on effects for the whole of society, driving up house prices in areas of high demand, inhibiting economic growth and making it harder for good quality public services to be delivered.” We have heard this argument for many years and whilst successive governments have acknowledged the problem, they are unable or unwilling to address the problem. With restrictive planning guidelines in place etc, the situation is only getting to get worse.

What does this mean for the overseas investor? The obvious answer is that they should buy property in the UK. The basic law of supply and demand means that with a limited supply and growing demand prices are bound to rise. Unfortunately, whilst a lot of people will agree they should buy property in the UK, many of them can’t buy in their preferred location of London. The cost of buying even a one bedroom apartment there is prohibitive and so they stay on the sidelines and don’t invest. Historically, buying in London has been a sound strategy and there is no reason to believe this will change. However, London does not have the sole rights to good property investment locations and other markets in the UK can be considered. It is all about the four ‘rights’ – The right property in the right location for the right price and at the right time. Rental demand in the more popular southern England locations is strong and if you follow the four ‘rights’ and have the property managed properly there should be attractive tax- free returns over the medium term.

Sydney opera house

Is the Australian residential property market set to recover?

The Australian residential property market got off relatively lightly during the financial crisis of 2008/9 and surprised many people with its resilience. A recovery in 2010 raised hopes that the market would power on but 2011 saw price reductions and a lack of interest from overseas buyers as the strong Australian dollar deterred investment. As we head through 2013 there are signs that the market is recovering with The Real Estate of Australia advising that prices have risen by up to 4% over the year. The Australian Bureau of Statistics supports this view and advises that for the year ending Q1 2103 the house price index for the country’s major cities rose by 2.6%. So should investors jump into the Australian market now?

As with any market, it is almost impossible to accurately forecast what will happen with prices. However, the basics for a rising market appear to be in place with lower interest rates and improved affordability in most states. The economy is still moving along nicely, growing by 2.5% over the past year and inflation is expected to remain in 2% to 3% p.a. so there should be no need to increase interest rates in the short term. Rental yields are at around 4.5% to 5.5% and are in line with most developed countries. Rents are rising particularly in growing cities such as Perth and Sydney.

Whilst all this sounds good from an investors point of view, residents of Australia may have a different view. The country ranks as one the top five most unaffordable countries in the world. For individual cities, Sydney ranks alongside Hong Kong and Vancouver in terms of un-affordability. This has driven many people, particularly those at the bottom of the property ladder, to become long-term renters. Like many countries, Australia is simply not producing enough homes to meet a growing demand. With restrictive planning policies, onerous tax burdens on developers and a lack of development finance this situation is unlikely to change in the foreseeable future.

One issue concerning some overseas investors is the possible effect on the Australian economy from falling demand from China for its natural resources. However, according to the Australian Bureau of Statistics the economy grew by 2.5% for the year ending Q1 2013 and similarly acceptable growth is expected over the medium term.

As advised above, another issue putting off some overseas investors is the strong currency. However, the Reserve Bank of Australia Governor Glenn Stevens recently said “The Australian dollar has depreciated by around 10 per cent since early April, although it remains at a high level. It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy.” Nevertheless, the days of an under valued Australian dollar seem to have gone for the foreseeable future and parity with the US dollar is likely to become the norm.

We have been involved in the market there for many years but have stayed out of it since 2008. The signs are that now may be the time to jump back in. As with all investments, there is always a risk that it will not perform as expected. Having said that, if the aim is to own a safe and profitable property investment then the Australian market is certainly worth considering as we head towards the end of 2013.

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Is UK student accommodation an ideal property investment sector?

Student accommodation in the UK is experiencing sound growth as investors see it as a viable and profitable property investment sector. What was once the domain of the institutional investor is now being marketed to individual investors with investment levels starting from around GBP45,000. Many smaller investors have entered the sector, but is it simply a ‘flavor of the month’ opportunity or will it be a sound medium term investment sector?

To answer that question we must first look at the underlying demand for student accommodation in the UK. A common concern among investors was whether the recent increase in tuition fees would reduce the number of applicants and universities would have unfilled vacancies. The good news (or bad news depending on your view point) is that the fee increase had minimal impact on applicants, which still exceeded the available places. For 2012 the total applications in the 18 – 20 age group were over 90,000 above the number of acceptances in 2011. These students still need somewhere to live and there has been no shortage of demand for well located, purpose built accommodation.

The ideal answer to the shortage of accommodation from a student’s point of view is for the universities to provide the accommodation at a subsidized rate. However, this is certainly not going to happen now or in the future. The government hasn’t got the political will let along the financial resources to fund such development. There would also be a public outcry, since overseas students would take many of the available spaces up.

The above means that the private sector has to step in and provide that accommodation. Whether we like it or not, today’s youth don’t want to live in Mrs. Smith’s back bedroom five miles from the university. They want to live within walking distance, close to their friends and in modern blocks with all the amenities including en-suites, common rooms etc. Whilst these places cost more than Mrs. Smith’s back bedroom, many parents can still afford to pay the figures being asked and this will continue indefinitely.

Of course, some locations will fare better than others over the long term. A few will be over developed which will put a strain on the rental yield as students have more choice and are in a stronger negotiating position with a landlord. However, places like Canterbury, Chester, York and Durham should not suffer from this problem, as the local councils will not allow over development to adversely impact their cities. Of course, some investors will be attracted to the major cities, but care should be taken in this regard. At the end of the day it is all about how many students are studying in the location, how much suitable accommodation is available and how much future development will the local council allow. If development is restricted and there is currently a substantial shortage of accommodation the prospects for income and capital growth should be sound.

The above is clearly demonstrated in the case of Chester. This is a historical, walled city dating back to the Roman times and the council will not allow over development as it seeks to main its heritage and tourist appeal. The University of Chester provides accommodation for 1,000 students, but there are over 16,000 studying in the city. The current shortage of suitable accommodation will remain for the foreseeable future.

Another concern of smaller investors is the ability to re-sell the unit in the future. The secondary market is certainly not as well developed as the general residential sector, but this is gradually changing. The sheer number of quality units that are being sold means that in the future financial advisers, local estate agents and web portals will be actively involved in the sector. Where people want to sell and others want to buy, advisers and agents will always put themselves in the middle and student accommodation will be no different.

One particular aspect of student accommodation that appeals to smaller investors is the rental guarantee offered by some developers. We have been developers ourselves and we are a little cynical about such guarantees. However, in the case of student accommodation, particularly in the better-suited locations, rental demand is so strong the guarantee has some validity. Some developers are offering a 9% net yield and even after some pruning by our ever-cautious team the net figure still comes out around 8% p.a.

In terms of capital growth, the sector will, in our opinion, lag behind prime central London apartments which has enormous international following. However, given its growing popularity both in the UK and overseas it should at least match, if not out-perform, the general residential sector. Student accommodation should be regarded as an income play and will appeal to those who are looking for an ongoing, secure and attractive rental income. Many investors feel that in times of uncertainty this is preferable to the vague prospects of capital growth in the general residential sector in the future. If you don’t want to buy in prime central London, they are probably right.

San Francisco Bride1 copy

San Francisco Bay Area – a great property investment market for 2013

The Bay Area housing market continued to improve as property investment location in 2012. The area enjoyed strong sales and rising sale prices fueled by increased demand, strained inventory, record-low mortgage rates and robust investor interest. The market’s performance in November reflects the improved performance. A total of 7,296 new and resale homes were sold in the nine-county Bay Area in this month and was the highest for any November since 8,042 homes were sold in 2006.

‘With the mismatch between supply and demand, there’s upward pressure on prices,’ said John Walsh, president of real estate information company DataQuick
The median price paid for a home in the Bay Area was $438,000 in November 2012. That was up 5.3% from $416,000 in October and up 20.5% from $363,500 in November 2011. The November 2012 median price was the highest since August 2008, when it was $447,000. Inventory is declining, and in particular the amount of distressed property, which undermines property prices, is falling. In November distressed property sales – the combination of foreclosure resales and “short sales” – made up 35.0 % of the resale market. That was down from 35.2% in October and down from 50.1% in November 2011.

Foreclosure resales – homes that had been foreclosed on in the prior 12 months – accounted for 11.5% of resales in November 2012, down from 11.7 % in October, and down from 25.2% in November 2011. The level of foreclosure sales in November 2012 was the lowest since 10.1% in November 2007 ie before the property crash and well below the peak level of 52.0% in February 2009. The long term average for foreclosure resales over the past 17 years is about 10% and so the level is now almost back to this ‘normal’ proportion.

Short sales – transactions where the sale price fell short of what was owed on the property – made up an estimated 23.0 % of Bay Area resales in November 2012. That was down from an estimated 23.5% percent in October 2012 and down from 24.9 % a year earlier. Investment buyers, many from overseas, continue to be active in the Bay Area market and in November purchased 24.4% of all Bay Area homes, up from 23.7 % in October, and up from 21.7% a year ago. For investors looking for good rental returns and capital growth the San Francisco Bay area may be the ideal property investment location.

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London property investment – 2012 and into 2013

The central London market performed well as a property investment location in 2012 as international money continued to pour into the market. The consensus is that prices rose between 8% and 9% over the year. The market has certainly recovered since the crisis in 2008. It is now over 10% higher than the peak in the first quarter of that year.

Asian based buyers, principally from Hong Kong and Singapore, dominated the ‘off plan’ market with some agents commenting that up to 40% of such transactions came from these locations. The market for £1m plus properties was much more evenly spread. Russia led the way, supported by India, Hong Kong, Italy and the USA in this sector.

According to one leading agent, overseas buyers purchased new build properties worth over £2.2 billion in 2012. Foreign buyers now account for more than 50% of sales in central London and there are no signs of this slowing.

The upwards push in values over the year impacted on rental yields and these fell marginally. Whilst yields vary from between 4% and 6% depending on the location, some prime properties are struggling to show even 4%. Importantly, good quality, well located properties continue to be in demand. As with sales, over 50% of prime properties are now being rented by international tenants. In the year ahead London will continue to enjoy a strong inflow of expatriate workers and we can expect the rental market to remain strong.

From an investment perspective, London is continuing to be seen as a ‘safe haven’. Importantly, its residential market is also being viewed as a very profitable sector. Problems with the Euro and political unrest in areas such as the middle east only adds to its appeal and with its favourable tax regime for overseas investors it is not difficult to see why it will continue to attract international investors.

As we head into 2013, the general UK market for housing will see little if any growth. Although sectors like student accommodation will perform well, growth in the rest of the country will be in isolated locations. Fortunately for investors, central London has become a totally different market to the rest of the UK. Whilst we should see real growth in this location, this is unlikely to be spectacular. Some analysts and agents are forecasting growth of between 3% and 5%. Although some are more bullish than this, there are ‘bears’ out there who feel there will be little if any growth. The good news is that the consensus appears to be that prices should not drop so there should be little downside. Prices should continue to go in one direction and many investors will take the view that now is as good a time as any to buy in one of the world’s safest and most profitable property markets. It is hard to disagree with that.

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.

Property investment – income or capital growth?

We are often asked by investors whether they should focus on rental income or capital growth when considering a property investment. The answer is very simple – it depends on whether you are confident that the capital growth product will perform at the level you expect it to.

Some investors believe that while they are working and earning an income the emphasis should be on capital growth. They have no real need for an additional income and the aim should be to maximise their return over the period they hold the property. If the market performs well and prices rise substantially the return on their investment in geared/mortgage investment should be higher than the typical rental income they would have enjoyed. As he or she moves towards retirement the emphasis should then change towards income producing assets which would replace the previously earned salary. There is nothing wrong with this strategy, although in practice few people adopt it when it comes to property. Investors become familiar with a sector such as residential where the emphasis has been on capital growth and do not have the confidence or knowledge to diversify into income producing sectors such as commercial or industrial. The danger with this strategy of course, is that all markets suffer corrections from time to time. If you are forced to sell when prices have dropped you may lose all the gains made to that point.

Someone once remarked ‘You never go broke making a profit, no matter how small that profit is’. It sounds simplistic, but when it comes to property there is a lot to be said for it. Lots of astute investors believe that a high net rental income is far more important than the unknown variable called capital growth. They are satisfied with a real net return, after all costs and taxes, of 5% – 8% p.a., and believe that any capital gain through an appreciation in the value of the property is an additional bonus. It is hard to argue with this point of view, especially given that even relatively low capital and rental growth should match inflation over the medium term so the real value of the income enjoyed does not fall. The rental income investors adopting this approach enjoy is certainly better than current bank interest rates and it is accessible now rather than sometime in the future when the property is sold.

Before we are deluged with emails telling us that we should not forsake capital growth, let us clarify what we are saying. We are firm believers in capital growth opportunities. However, there are times and circumstances where, within a diversified property portfolio, the income oriented properties should dominate. Retirement is the obvious one we mentioned above, another is when there is considerable uncertainty over the prospects for capital growth within a preferred market. In any event, both opportunities should be included in most portfolios with the only real issue being in what proportion

As our clients will know, we recommend the residential sector in central London and New York and Walton pre-development land in the USA as safe and financially rewarding capital growth opportunities. They offer exposure to different countries, currencies and sectors and the historical returns have been attractive. Condos and single family homes in the USA offer a mixture of high income (5% -7% net) plus capital growth over the medium term. Some will see them as more capital growth plays, but the income is attractive enough for them to qualify as a hybrid opportunity. Student accommodation and storage units are examples of opportunities where the emphasis is on income (7% – 8% net) with some capital growth.

Determining the correct strategy for an investor is best achieved by first discussing his or her needs and objectives. Once these have been identified it is then a question of selecting the opportunities that meet these. Some investors will want primarily capital growth, some will want income. At least with the right advice and opportunities, investors can make an informed decision and make the right property investment.

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London market enjoys rising prices

The central London market continues to show why it is regarded as one of best property investment locations in the world. According to CBRE, prices for houses has risen by 6% over the last quarter and by 18% over the past year. The gap between Prime Central London and Greater London is expanding; average prices across the whole of London rose by only 2% over the last quarter and 5% over the course of the year.

A lot of this growth has been fueled by demand from Asia, particularly at exhibitions in Hong Kong, Singapore and Kuala Lumpur. Interestingly, demand is also growing from investors in countries such as Thailand, Indonesia and Vietnam. With the problems of the Euro, many European investors are also entering the market and there has been an increase in buyers from Spain and Greece. London’s reputation as a ‘safe haven’ is likely to continue to attract overseas investors for some time and with limited supply this will inevitably force prices up even further.

It is worth noting that across Greater London new builds are selling with a 5% premium and in the boroughs of Kensington and Chelsea, and Westminster over the last quarter, they are, on average, double the value of their second hand counter parts.

Whilst the sentiment is the same, according to Knight Frank the growth rate over the past has not been quite so impressive. According to the agent, the annual increase was a mere 10.1 percent with demand for apartments outstripping that for houses. Prices are now 52% higher than in March 2009, so investors who bought at that time should certainly be happy.

No property market is immune from a correction and eventually central London prices will fall. Many investors feel this will not happen in the short to medium term and in the meantime there are some healthy profits to be made. It is hard to disagree with this point of view. It is pretty safe bet that London will continue to be a sound property investment location for the foreseeable future.

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Expansion of our London property investment operation

We are pleased to announce that we are extending our London operation to be able to offer our full range of property investment services to European based investors.

Our London office, which was set up in 1997 when Dan Wainwright our current UK Director joined us, has always focused on sourcing opportunities and offering an ongoing management service. It has never marketed to UK based investors. With the expansion of the office, investors in the UK and Europe can now access our opportunities and deal direct with London rather than our Hong Kong.

Dan will continue to oversee the London operation and in the coming months we will be expanding his support team. We will also be taking part in various exhibitions and events throughout Europe and we will keep all our clients and associates up to date with these activities.

The London expansion will not in any way effect our Hong Kong based operation. Tony, Diana and the team will continue to service clients in Asia as they have always done. It will be business as usual in that part of the world.

We are all excited by the challenge of growing our London operation. We always seek to establish long term relationships and look forward to doing so with European based property investors in the years ahead.

33C View South

Manhattan confirms its appeal as a property investment market

The supply of new apartments for sale in Manhattan supports the fact it is a sound property investment market. Supply fell significantly last month, slipping 17.2% to 1,185 from August of last year. The result reinforces the belief that a lack of inventory will force prices higher across all segments of the market.

“New development inventory has continued to decline, year over year’ said Sofia Song Vice President of Streeteasy.com who commented on the market there. She added that declines have now occurred for twelve consecutive months.

The median price in Manhattan has certainly shown improvement rising 11.1% to US$1.45m. ‘With tight inventory, sponsors have been standing firm on prices’ said Ms Song. This is supported by the fact there were only 128 price cuts on listings in August, 28% fewer than a year ago.

Buyers do not seem deterred by the firmer prices with signed contracts up 26.3%. ‘With inventory being tight everywhere and as pent up demand grows, the new development projects currently in the pipe line are becoming more and more highly anticipated’ she said.

Whilst the above comments refer to new developments, it echoes what is happening in the larger established homes market. Manhattan did not experience the crash markets such as Orlando experienced and has maintained its status as a ‘safe haven’ location. With strong rental demand and prices forcasted to rise it should also be considered as a sound property investment location which will show good returns over the medium term.

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Student accommodation impresses property investment analysts

The UK student accommodation sector continues to impress property investment analysts and commentators. Good growth is expected over the medium term and the sector is gaining wide market acceptance. The introduction of higher university fees does not seem to have affected the market, with demand still out stripping supply (and likely to do so for the foreseeable future). Prices for individual units are around GBP50,000 and net rental yields are 5% plus. This makes the units appealing to smaller investors seeking security and attractive return.

We have just released our 2012 report on the sector and it makes interesting reading. If you are interested in researching this sector of the property investment market, please contact us to receive a copy of the report.

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UK residential figures support property investment but questions remain

There has been a lot of negative press about the UK residential sector over the past year and this has had a detrimental effect on property investment there. With the exception of London the view is been that investors should stay away from the market. However, figures just released by the Office for National Statistics present a different picture.

In the 12 months to June 2012 UK house prices increased by 2.3%, unchanged from the 12 months to May. House prices continue to remain relatively stable across most of the UK. The year-on-year increase reflected growth of 2.8% in England, which was offset by declines in Scotland and Northern Ireland of 1.0% and 11.9% respectively. House prices remained unchanged in Wales.

Some parts of the England fared better than others, with London seeing prices rise by 6.5%. Increases in the South West and South East were 2.3% and 2.2% respectively. The only decrease in England was the North East, which fell 1.3%.

New homes were ‘more popular than ever’ according to Barratt Homes. According to a survey this leading builder carried out, there has been a 27% increase in the popularity of new build property, since a similar survey was carried out in 2008. This is supported by ONS figures which show prices of new dwellings rose by 5.9% during the 12 months to June 2012, while the price of pre-owned dwellings increased by 2.1% in the same period.

The first time buyers market also showed some improvement. In June 2012, prices paid by first time buyers were 3.1% higher on average than in June 2011. For owner occupiers (existing owners) prices increased by 2.1% for the same period

Our readers should not get carried away by the above though. Whilst London should continue to perform well over the medium term the rest of the UK faces an uncertain time. If you are buying outside London you should look for a niche sector and a secure income stream. It’s a sound strategy for property investment in uncertain times.

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Dublin property investment update

The Dublin property market has seen a surge in interest in the last six months from European buyers who are keen to snap up sound property investment opportunities there. This is a market that has received little publicity in Asia and is not on the property investment radar of most investors based in that region. So are there sound opportunities in the buy to let market that our clients can take advantage of?

Ireland’s economic problems have been well documented and they are certainly not going to go away in the short term. Nevertheless, the country’s approach to solving its problems has been warmly applauded by its fellow EU members. It may have got itself into a mess, but at least it is taking the painful steps necessary to get itself back on an even keel. It will take time, but the Irish government at least has the political will to do it whereas may other European governments haven’t.

The property market has been a victim of the country’s woes, although some would argue it was partly the cause. Prices sky-rocketed in the mid 2000’s fueled by cheap money, speculative building and lax lending from financial institutions. Sounds familiar? The USA and Spain are classic examples of markets that fell into that trap. The result of the 2007/8 crash in Ireland was house prices falling by around 35% and the banking crisis resulting in housing loan approvals falling by over 70%.

Since the crash the market has continued to trend downwards and house prices in Dublin are now 56% lower than at their peak in 2007. Apartments have fared even worse, with priced down over 60%. Despite nominal growth in the last few months, the market reverted to type in June and fell again to show a fall of 16% over the past twelve months.

Trying to put a positive spin on the situation, one commentator said ‘So far this year, we’ve seen varied reports on house prices in Ireland but this official record should provide more certainty for investors. The fact is that while residential house prices have declined slightly more in the year to 2012, the levels of decline are broadly speaking, stabilizing.’ That is an interesting way to view the market in our opinion. It may keep falling, but at least it is only at 16% a year?

The possible collapse of the Euro and the effect this would have on the market is certainly an issue for Asian investors. However, it doesn’t seem to concern many Europeans. They are taking the approach that over the medium to long term prices will recover and buying at or near the bottom of the market is always a sound strategy. That is not to say we are near the bottom of the market though. Many investors are sitting on the sidelines waiting for firm evidence that the market has bottomed. Others will look for the first signs of growth before they invest. Even if the bottom of the market is close at hand, it could bounce along at depressed levels for some time. The general economy is unlikely to rebound strongly any time soon so it could be a bumpy ride for investors jumping in now.

Still, estate agents are telling us there is a shortage of product in and around the Dublin city centre and sales levels are picking up. If you are very brave you could enter the market now or you could adopt a more cautious approach and wait until later in the year or even next year. Our recommendation would be the latter. Property investment in Dublin is a sound strategy, but perhaps not just yet.

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Napa Valley – property investment on an upward trend

The residential sector in Napa Valley is opening up great property investment opportunities. A Californian real estate service, DataQuick, has estimated that in June prices in the greater San Francisco Bay Area were up by 10.4 % over the past twelve months. The good news for property investors entering the market now (but unfortunately not people who bought at the peak) is that the median house of $417,000 is still a long way short of the peak of $665,00 in 2007.

Reassuringly for investors, distressed sales fell across the market with the percentage falling from 44.3% a year earlier to 36.1%. The overhang of foreclosed properties is disappearing, which is good news going forward. Investors are certainly seeing the opportunity and accounted for 23.4% of sales compared to 20% last June.

Interest is particularly keen in Napa Valley, the USA’s premier wine region. It had the second highest change for homes sold in June in the Bay Area. There are planning constraints in place which help prevent over development and help make it a sound investment location. We were there looking at the market in June and it certainly has a lot going for it. The key is to find the right product in the right location at the right price. When we find it, our clients can enjoy the rewards from a sound property investment in one of the USA’s premier locations – Napa Valley.

Statue of Liberty

It is official – the US housing market has turned at last.

At least, according to the Wall Street Journal it has and that is great news as far as property investment is concerned. An article that was published in the WSJ on the 12th July opened with ‘The housing market has turned at last. The US finally has moved beyond attention-grabbing predictions from housing ‘experts’ that housing is bottoming The numbers are now convincing.’

There are several articles available which confirm that most analysts believe the worst is over. Of course, they could be wrong and things could get even worse from here. However, that is highly unlikely. After the worst property recession in living memory there are positive signs that the market is recovering. The inventory of established homes for sale has fallen, despite the number of foreclosures, and the number of vacant homes is also down.

We have previously advised our clients that a number of analysts or ‘experts’ were of the opinion that the US market was bouncing along the bottom. We have also said that picking the bottom of any market is notoriously difficult. If investors buy within 10% of the bottom they will have done extremely well. We are now in that position so by buying now and exercising a little patience there should be some sound property investment returns going forward.