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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.

Autumn

The UK Autumn Budget and the effects on the property market

The UK Chancellor’s Autumn Budget contained elements that will affect ‘buy to let’ owners of UK property. The Chancellor is trying to address the high cost of renting private accommodation and the chronic ongoing shortage of houses, particularly in London where nearly one third people rent rather than own the properties they live in.  As you would expect, not everyone is happy with his proposals:
 
Letting agents and the fees they charge

Letting agents will no longer be able to charge tenants for the services they provide.  Until now, letting agencies have been able to charge both tenants and landlords for administrative services such as checking references, preparing a tenancy agreement, renewing a tenancy and ending a contract. The agencies will now need to pass more of those charges on to landlords, or absorb part of the costs themselves.

As you would expect, letting agents have condemned the announcement.  David Cox, managing director of the Association of Residential Letting Agents, said: “A ban on letting agent fees is a draconian measure, and will have a profoundly negative impact on the rental market. It will be the fourth assault on the sector in just over a year, and do little to help cash-poor renters save enough to get on the housing ladder.”  Richard Price of the same organisation said  ‘A ban on agent fees may prevent tenants from receiving a bill at the start of the tenancy, but the unavoidable outcome will be an increase in the proportion of costs which will be met by landlords, which in turn will be passed on to tenants through higher rents.’
It also hasn’t gone well with everyone on the landlord side of the equation. The expectation by some is that if the same level of service is to be provided then the landlords will have to pay more and this will inevitably be passed in the form of rising rents.  Richard Lambert, of the National Landlords Association, said: ‘Banning letting agent fees will be welcomed by private tenants, at least in the short term, because they won’t realise that it will boomerang back on them.’

However, a former Royal Institution of Chartered Surveyors residential chairman said letting agents could find it harder to pass costs on to landlords. ‘The problem with fees charged by letting agents to tenants is that landlords have a choice as to which agent they use whereas tenants generally don’t,’ he said. ‘Landlords can go to another agent so the agents will have to absorb the cost and get it from somewhere else. This is why Foxtons’ share price plummeted because agents like them who add a lot to the tenant’s cost of renting, will suffer. The trouble is there are a few rogue agents who have been overcharging and as a result all agents will lose out financially as a result.’

‘The devil is always in the detail’ so letting agents should not throw themselves in front of the 9am express train into London just yet.   Nevertheless, agents are going to either suffer a fall in their profits or landlords are going to have to pay more.

£3.15 billion is being set aside for 90,000 new houses in London

The London Mayor will use the cash for housing tenures, including those with below-market rents for low-income Londoners and homes with rents set at no more than a third of average local income for middle-income earners.   However, housing experts believe the capital needs to be building at least 50,000 new homes per year to sustain a population set to grow to ten million by 2036.  Whilst it may be good to see a conservative government helping lower income people, it is certainly not going to alleviate the problem as demand grows and the shortage increases.

£1.4 billion is being set aside to deliver 40,000 affordable homes in the rest of the UK

It sounds like a lot of homes, but in reality it is a drop in the ocean in real terms as the government has given little detail as to how it will be spent.  It could be used  to buy the land and build the houses, which means a cost of no more than £35,000 each. You don’t get much for that amount anywhere in the UK so the end result is certainly not going to be that many homes.   Alternatively, the money could be used to subsidise the cost, which would increase the potential number.  Either way, it is a good eye catching figure the government can use to say it is helping address the problem for lower income people.

A £2.3 billion housing infrastructure fund is being launched

This is intended to help provide 100,000 new homes in high-demand areas.  However, no details have been released yet.

There was no reversal of stamp duty charges for second homes or on cuts to mortgage tax relief, as hoped by landlords

This comes as no surprise, despite warnings that the recent changes are adversely affecting the property market.  The government is not going to change course in the short term so the market will continue to suffer.

Summary

We have been critical of the attempts by successive governments of both political persuasions to address the housing crisis.  At least this budget is an attempt to do so, but it falls far short of what is required.  The cynical question is simple – is there an election on the horizon?

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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.

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Why investors should use a search service for London property

There are always lots of exhibitions taking place in Hong Kong, Singapore, KL and elsewhere where the agents are supposedly offering the best opportunities in London. Of course, if there are four or five exhibitions there are four or five ‘best opportunities’. The following weekend there is another round of exhibitions with an equal number of ‘best opportunities’. They can’t all be that great and it is fair to say that all the statements made by zealous salespeople at these events cannot be relied on. It is very much a case of ‘caveat emptor’, i.e. ‘buyer beware’. It is also fair to say that purchasers are usually paying a very full price. Developer sare not spending large amounts of money on these events with recouping it through the purchase price. You can find some good properties at the exhibitions, but you won’t find many bargains.

In terms of the UK market, most buyers expect the vendor to pay the agent a fee and do not want to incur this themselves. This means the agent is obliged to get the best price he can for his client, i.e. the vendor. The purchaser will often forget this as the process of identifying and negotiating the purchase unfolds. Of course, there are some good advisers who will seek a win-win situation and we pride ourselves that we fall into this category. This approach ensures the purchaser gets a quality property at a fair and reasonable price with a great after sale service. The intention is to build long term relationships with both the developers and the clients. Unfortunately, not all advisers and estate agents adopt this approach and we must remember they are representing and being paid by the developer/vendor. Unless they want to build long term relationships with the clients, and most agents pay lip service to this as people are attracted to exhibitions in any event, it is too easy to focus on keeping the principal party, i.e. the developer, happy.

The best way to acquire a London property is to use a search agent. Some people will argue that paying a fee of 2% is needless when they can get the vendor to pay. We genuinely believe this is short sighted. Retained agents (i.e. paid by the purchaser) are extremely popular with selling agents as they do not have to share their sales fee. This results in them being offered the best properties that they have on their books. Being retained also allows the adviser to focus on getting the very best deal for his client, i.e. the purchaser. Ensuring a discount to cover a 2% fee should be more than achievable for the right adviser. Importantly, you have an experienced and capable adviser researching the market, identifying the best property to buy and then negotiating on your behalf to get the best price. Even without the discount, it could be argued that the peace of mind that comes from knowing you are buying a quality property and are most certainly not over paying for it is worth the fee anyway.

So why don’t more people use a reputable search agent? For some it is too easy and convenient to go to an exhibition and buy there. For others, they do not want to incur the 2% fee and believe the selling agent will represent their interests fairly. Some people feel they know enough about the market, and have enough time, to find the right property, make an informed decision and then negotiate the right price. Of course some people do, but for others the right property search service is the ideal option. There are some great opportunities in the London market. Make sure you approach it correctly, with an expert acting exclusively for you.

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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.

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Exchange rates and the London property investment market

The London residential market certainly appeals to overseas property investment buyers and the reasons are fairly obvious: international business centre, tolerant society, stability and effervescent property prices. But what about the currency? For certain non-UK nationals the currency driver appears to dwarf other advantages. Leaving aside variations in figures according to source and interpretation, beneficial exchange rates effectively give certain nations buying into London huge purchasing power, with some currencies having appreciated as much as 45 per cent against sterling over the past five years.

With 45 per cent to 62 per cent of London’s most desirable areas owned by high net worth individuals (HNWIs) from abroad who divide their time between multiple homes, London, more than any other world city, suffers from the doughnut effect: the hollowed out centre in which few people now live permanently.

Research recently undertaken covering the period May 2008 to May 2013 has revealed the extent of discounts on prime central London property enjoyed by overseas buyers benefiting from exchange rates against a weak pound. Some researchers are indicating that at the top of this scale of beneficiaries are the Chinese, who have seen the renminbi rise 30 per cent against sterling during the five years in question, while the prices of property in prime central London (broadly defined here as West-minster and the Royal Borough of Kensington and Chelsea) have risen 25 per cent in the same period.

As one party said “If a given house cost £1m in 2008, and £1.25m in 2013, because of the strengthening of the renminbi, a Chinese buyer today would only be paying Rmb11.7m as opposed to Rmb13.6m in 2008: a saving, in real terms of 14 per cent on the 2008 price.” On this calculation, buyers from Singapore and Malaysia (both receiving a 12 per cent discount) and Switzerland (saving 11 per cent) are the next largest beneficiaries of currency exchange fluctuation, while the US dollar affords a 5 per cent saving.

Meanwhile, the 7 per cent stamp duty levied on houses priced at more than £2m, introduced in the 2012 Budget, has had little impact on this market. According to agents, the number of new applicants for the most expensive London properties was 40 per cent higher between January and April 2013, than over the same period in 2012. In addition, the 15 per cent stamp duty on any property over £2m purchased through companies and special purchase vehicles – a favoured method of Chinese investors seeking to circumvent their country’s currency controls – has led to more inventive solutions, which do not necessarily involve Macau’s casinos and pawn shops.

Where there is a will, there is a way. Such huge purchasing power would suggest a dominance in the market of those nationals whose currencies derive the most favourable exchange rates, namely, the Asian market; but is this what is happening? It appears that by 2011, half of all homes in prime central London were purchased by non-UK buyers. Candy & Candy’s development at One Hyde Park has been sold almost exclusively to foreigners at prices allegedly reaching £7,000 per sq ft. One leading London agent claims that international buyers account for 62 per cent of the prime central London market. But who, exactly, is buying?

Figures for the past 12 months from one agent shows that 43.6 per cent of its sales in the £5m plus bracket, were to UK buyers. Russians, whose oil and commodities businesses are transacted in US dollars, are the next largest group of investors, constituting 10 per cent of the prime central London market, while US buyers account for 4.3 per cent, with the Swiss at 2.1 per cent, and Australians (whose currency affords them a 10 per cent saving on 2008) at 0.7 per cent. Of the rest, a mere 0.6 per cent were Malaysian, despite the strength of the ringgit, while China and Singapore make an appearance only in Knight Frank’s £2m-plus table, representing 1.5 per cent and 0.6 per cent of purchases, respectively.

Another agent reports that 29 per cent of its residential sales in prime central London, in the first quarter of 2013, were to members of the EU, all of which suggests that exchange rate considerations are not the principle driver of investment in London’s prime property markets.

It is fair to say that currency is only one factor out of many. The euro crisis has been a big driver of market demand in recent years, pulling in more buyers from the eurozone who have been looking to diversify their investments and move money out of euros and into a sterling environment. There is no doubt that rising wealth taxes within countries like Italy, France and Spain has also encouraged some buyers from those markets to look to London.

Demand for a ‘safe haven’ investment has led to French web searches for property in prime central London peaking in February this year following President Francois Hollande’s proposal for a new wealth tax. Worldwide turmoil, both economic and political, has been fuelling further demand for prime central London homes, from buyers in Greece to members of those countries affected by the Arab uprisings.

Meanwhile, as UK nationals wanting to buy property are forced to migrate from central London, the weakness of sterling suggests that competition for prime central London properties among international buyers is set to increase, with agents and advisers predicting more than 20 per cent growth in all prime residential values over the next five years. For the time being, however, the investment potential afforded by strong currencies appears relatively unfulfilled as more complex factors come into play, trumped by the historic view of London as a safe financial, social and political haven, whatever the cost.

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London Search Service

St. David provides a comprehensive search service, which includes identifying suitable investment properties, handling all aspects of the purchase and providing a professional lettings and management service.

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The benefit to you in using our Property Search Service:

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  • By using the service you will have unrestricted access to a large range of properties for sale.  You will not be restricted to those properties handled by any one agent.
  • Out of the large number of properties that are available, St. David will identify and provide an objective assessment of those that best meet your requirements.
  • St. David will assess the rental and capital growth prospects and where appropriate will assist with any refurbishment work, furniture package etc.
  • Your valuable time will not be wasted considering unsuitable properties.
  • St. David will negotiate on the client’s behalf to ensure the minimum price is paid for the property.  The cost saving may easily be in excess of St. David’s fee.

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Once St David has been appointed it will undertake its research and subsequently forward details of suitable properties that meet the client’s requirements. For every property it recommends it will provide:
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  • Location map
  • External photographs of the street
  • Internal photographs of each room
  • Lay out plan and dimensions
  • Lease details, rental assessment etc.
  • Recommendations re refurbishment work etc.

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If the properties are deemed not suitable, St. David will refine the search criteria and provide additional properties for consideration.

Once the property has been chosen St. David will assist with all aspects of the transaction, including price negotiation, appointment of a solicitor, property conveyance and mortgage advice. It can also provide a full lettings and management service.

St. David is only paid if the client buys one or more of the properties it recommends. For details of our fee arrangement please contact us.

chelsea general  6

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.

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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.

Tower bridge - larger

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.

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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.

Silver Wharf

Central London apartments – 10% discount

We are pleased to able to advise that we can now offer apartments in Silver Wharf, London E14. It is rare that we are able to say you can secure a genuine 10% discount to the current market/list price but this is certainly the case with Silver Wharf. There are only nine apartments available and the vendor is prepared to lower the price to sell them quickly. We have confirmed that other apartments were sold at the list price. At the discounted price the apartments represent exceptional value.

The development is in a great location and will appeal to both tenants and owner-occupiers. The market in central London continues to look strong and if you are thinking of buying there in the near future you should take advantage of this opportunity and buy one of the Silver Wharf apartments.

London Big Ben

UK Budget – major implications for some buyers

The UK government’s budget announcement last week has caused concern for both existing and prospective property owners. A lot of media comment was subsequently made on how high value properties would be severely affected. Unfortunately, a lot of Asian based buyers may also be affected by the announcement, in some cases quite dramatically.

The UK government has certainly decided to get tough when it comes to stamp duty on expensive properties with the rate of Stamp Duty Land Tax on purchases of residential property over £2 million increasing from 5% to 7% from 22 March 2012. The rate for properties below this level remains the same.

Of interest to some overseas buyers is that if any ‘non-natural’ person, which includes a company, partnership etc., purchases a property for more than £2 million the stamp duty rate will be 15%. In the past investors have used companies to own property and have sold the company’s shares when disposing of the property. Under these circumstances Stamp Duty was only be charged at 0.5% and 0% if an offshore company had been used. The new rate means a minimum tax of £300,000, making it prohibitive to use such a structure.

Existing owners of such properties who are using a corporate structure may also be affected. The Government is talking about an annual Stamp Duty Land Tax for high value residential properties owned by non-natural person and this may come into effect from April 2013.

Whilst most Asian based buyers have not spent £2m on a property, it is worth noting the Government is considering imposing Capital Gains Tax on non-resident companies (BVI companies for example) that dispose of UK residential property. This potentially applies to all non-resident companies that own a residential property, not just those owning high value properties. The government wants to go through a period of consultation before committing to this, but if it is introduced it is likely to be in April 2013.

Of course, the devil is always in the detail. For example, no-one knows whether current values will be re-assessed prior to its introduction. What is certain is that if all non resident companies are taxed, a large number of Asian based investors will be severely affected. Advisers who advocated their clients use such an entity to own a relatively inexpensive London property as a means of avoiding inheritance tax will now need to identify what is now best for their clients. Of course, hindsight is always 20/20 vision and they will rightly argue that governments can change legislation at any time. Nevertheless, in these difficult economic times measures to curb tax avoidance were always going to be popular. Taking steps to discourage non-resident companies avoiding stamp duty and including them in the Capital Gains Tax net seems a logical step and one that could have been foreseen, with hindsight of course.

The good news is that there is no talk of offshore ‘natural persons’ being affected by the changes. London remains a safe and profitable haven in troubled times – just make sure you get the right structure in place at the outset.

Renaissance

New London project

As our regular readers would know we don’t offer new projects every week and we are very selective in terms of what we offer. We are pleased to be able to announce that we have identified a sound London opportunity which we can highly recommend. Renaissance is a newly completed residential development in Sydenham, London. Sydenham is an increasingly affluent suburb as young professionals and families are moving into the area from more expensive Dulwich and Crystal Palace. The new East London line which opened in 2010 has greatly improved the transport links from this zone three area making it attractive to commuters. The property is located just off Sydenham High Street, five minutes walk from Sydenham station, which gives fast access to Central London via the new East London line. Canada Water on the Jubilee Line, which links to Canary Wharf and to the West End, is only 15 minutes from Sydenham.

The two bedroom, two bathroom apartments, which start from GBP285,000, have been constructed to a high standard and contain quality fixtures and fittings. For investors seeking security of rental income from quality tenants and strong prospects of capital growth, Renaissance is the ideal choice.

Redfield Lane

London – an opportunity to buy and modernise the worst house in the street

There is a saying that many property investors are aware of – ‘You should buy the worst property in the best street you can afford’. This is an opportunity to do just that. As a result of our search service activities we have identified an outstanding opportunity to buy and modernise a freehold house in the heart of London. The street comprises quality homes and is ideally located, being a few minutes stroll to the heart of South Kensington and Earls Court. The property requires refurbishing and should be extended to provide an additional floor, rear extension and parking space. This will result in an increase in the value of the property and a finished house that will appeal to both tenants and owner-occupiers.

The opportunities are out there – you just need the right person to help you find them.

London

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

Thames

London update

UK house prices are continuing to fall with few if any signs of the market improving. Hometrack has advised that the average cost of a home was down by over 2% over the previous year. Demand remains weak with mortgages difficult to obtain. The likelihood is that prices will be even lower next year and it will be some time before the situation improves.

The good news for most overseas buyers is that agents will tell you that London is a very different market to the rest of the UK. To some extent this is true. The zone 1 and 2 central London market is being propped up by overseas buyers who are not experiencing the same difficulties in securing mortgages as their UK based counterparts are. Nevertheless, in many people’s opinion the London market cannot indefinitely avoid what is happening with the UK economy. In their opinion it is inevitable that given the severity of the problems the UK is going through this market will be affected.

As we have commented before, reputable parties disagree with the above view and are much more bullish about prospects for the central London market. However, it is worth noting there are rumors of falling sales rates at exhibitions in Hong Kong over the last couple of months. No-one wants to admit the Hong Kong buyer is losing his appetite for London apartments and it is fair to say some buyer fatigue was inevitable after the flurry of sales in the first half of the year. Given that demand from Asian buyers, principally in Hong Kong and Singapore, will be soft now until after Chinese New Year the real test will come in February/March when the London agents return in force and the exhibition circuit starts again. What happens at the exhibitions may have a profound bearing on what happens to the market next year. We will keep you posted.

London bridge

Growth prospects for the London market

There are many reputable agents operating in the London market and Savills certainly qualifies as one of the better ones. Over the years I have been particularly impressed by the standard of its research. The company doesn’t always say the market is perfect and now is the time to buy. In the past it has forecasted prices to drop, which must have made its research department very unpopular in the eyes of its sales teams. So when it comments positively on the prospects for the market it is time to sit up and take notice. The company’s research department is forecasting a 6.5% growth rate for London in 2012 and whilst some would see this as optimistic, it is not a back street, one man operation making that claim. Sit up and take notice – it is probably right!