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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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USA commercial property and its appeal to large and small investors

The USA commercial property sector performed well in 2016, but it is still under the radar for most Asia based investors who are missing out on some exceptional opportunities.  This is due to a variety of reasons including lack of awareness by investors and concerns over entering a large and diverse market for the first time.   However, with the right adviser large and small investors can enjoy the benefits of a secure and attractive income stream and sound capital growth.

The consensus of opinion amongst analysts and commentators is that the USA commercial sector will continue to perform well over the next five years.  It has certainly done this over the past thirty five years, having shown average annual returns of 8.8%.  With appropriate gearing this would have resulted in returns of 10% plus  p.a. and there are few grounds for believing this will not continue over the medium term.  As one leading asset manager put it:

USA commercial real estate fundamentals have rarely been stronger. While economic growth has been moderate, the supply of new buildings has been muted, resulting in higher occupancies and rents.  In the third quarter of 2015, occupancies among institutionally held properties reached their highest level in fourteen years. The Outlook remains upbeat.  Construction has steadily increased over the past five years, but in most sectors and markets in remains below both historic levels and growth in demand.

We are focusing our USA operations on the Chicago market and are carrying out due diligence on several opportunities that offer a real 7.5% p.a. after USA tax.   With investment levels starting from US$100,000 and rising to US$20m plus, we believe these will be sound investments for our clients.

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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.

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Short term development projects: Do you need to like the location?

A remark often made to us by investors is that they have no interest in investing in, or may not like, a particular market.  Quite naturally, there are sometimes valid reasons for this. Just as some people won’t invest in pharmaceutical or technology shares because they think the sectors will under perform, some people will think the same of certain property markets.  If prices are not going to rise within an acceptable time frame, or the rental income is not attractive, having a passive, capital growth investment property make little financial sense.

Should the same thinking apply to a short term development project where the return is not determined by capital growth?  Of course, if prices are falling then it makes little sense to develop a property as the downside risk may too great.  The eventual return is likely to fall over the construction period and there is no way of evaluating this properly.   However, if prices are stagnant then as long as there is sufficient demand for the finished product at the prices the developer needs to make a profit, and the project is costed and run properly, capital growth is not a factor. If there is any, it will only enhance the return. Under these circumstances there is every reason to undertake a low risk development project in that market.

The Costa del Sol is certainly an example of a property market that has seen a major correction.    As a result of the property crash prices fell by over 40% and whilst the market is now slowly recovering general property prices are not set to leap forward and show staggering returns in the short term.  The good news from a development point of view is that few, if any, analysts and commentators are forecasting the market to fall further.  For example, the Sociedad de Tasación’s new housing market bulletin for 2015 reports that the average price of new housing increased by 2.9% last year, reaching a price level equivalent, in real terms, to those registered in the month of June 2002.   In November 2015, the General Council of Notaries reported that the number of housing transactions carried out reached a total of 34,918, which represents an increase of 7.3% over the same month of the previous year.  This meant 18 months of continuous growth.

Some investors will argue that there is still a lot of property available on the secondary market so it makes no sense to build new properties.  In certain locations and price points this is certainly the case.  According to a study carried out by Idealista, 59% of the advertised homes are priced at lower than €100,000, while 23% cost between €100,000 and €150,000.   The homes with prices between €150,000 and €200,000 account for 10% of those advertised, and those between €200,000 and €300,000 account for 6% of the total. Importantly, just 2% of these properties are priced at over €300,000.   So if you develop properties that are priced at over this figure there is certainly no oversupply.

As Mark Twain is commonly quoted as saying, ‘Lies, damned lies and statistics’. It is easy to be selective and use statistics to support a point of view.  The fact is, some months the figures (and hence the headlines) are good, some months they are not. This is what happens when the market bounces along the bottom of the price cycle.  However, with the general economy improving and demand from overseas buyers picking up, the worst is behind the Spanish market.

So what sort of investment returns should an investor expect from developing in Spain?  This will depend on the location, the sector and the risk involved. Securing a change of use for land to be developed may produce an excellent return, but the risks will be too high for most investors.  Refurbishing an existing building will involve much less risk.   It is all about doing the right due diligence, working with the right professionals and adopting a conservative approach.  With an investment period of two years or less, and double digit annualised returns on invested funds, the financial rewards can be attractive.

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A secure income stream – peace of mind in turbulent times

Stock markets around the world are currently going through a degree of turmoil and analysts and commentators are undecided on what impact this will have on the world’s major economies.  Given the problems in China it is reasonable to expect more turmoil in the future. The economy there is now too large to be ignored by the rest of the world and depending on which reports you read, China certainly has some problems to address.   Whilst the good news for the property sector is that interest rates should remain low over the medium term, we realise many of our clients who have a major exposure to equities may face considerable volatility in the value of their portfolio.  Although we are property advisers and do not provide general investment advice, we have always acknowledged that investing in equities is a sound strategy and our position on this is not going to change.  In times like this though, peace of mind may be difficult to achieve and sound investment advice and cool heads will be needed.

We keep mentioning a secure, attractive rental income stream as we are firm believers of its merits.   Of course, we are also advocates of capital growth opportunities. Each client has their own needs and  it is all about creating the right balance within each individual portfolio.   As many readers of our property bulletins will know, we have been operating for over twenty years and our clients who bought properties, particularly in London, in the 1990s and later have benefitted enormously from rising prices.   They will continue to enjoy sound returns over the medium to long term, even if values ebb and flow according to market conditions.  However, the UK has now introduced capital gains tax for overseas investors and many investors are now turning to income producing properties to support their long term capital growth investments.  They realise that a balanced portfolio is becoming increasingly important and a healthy cash flow helps them sleep at night.

It is universally agreed that there is a shortage of properties in the UK and nowhere near enough houses are being built to meet demand.  In residential areas throughout the country there is strong rental demand as, good times and bad, people always need somewhere to live.  With interest rates low, house prices are continuing to rise making them unaffordable for many people.  The UK is developing a generation of tenants – people who simply can’t afford the deposit or don’t want to burden themselves with a huge mortgage.  The supply of tenants is growing every year and there is no likelihood of this falling.   This means a well located, low maintenance property that is well managed is like having money in the bank, except the income is better then the interest rate the bank pays!   And of course, rents and property values typically go up in line with inflation or better so the real value of the income is maintained over the long term.

Some investors will say that they don’t need extra income so a strategy of capital growth with a nominal income stream is ideal.    For many investors this approach works, especially for those who are not concerned when markets fall and are prepared to take a long term view.  However, some of us like the security of seeing money go into our bank account every month.  It is a very reassuring feeling and a real net return of 6% plus p.a.certainly protects the downside.

A steady increase in the value of the portfolio is called peace of mind. In turbulent times, it certainly has its appeal.

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A secure income stream – peace of mind in turbulent times

Stock markets around the world are currently going through a degree of turmoil and analysts and commentators are undecided on what impact this will have on the world’s major economies.  Given the problems in China it is reasonable to expect more turmoil in the future. The economy there is now too large to be ignored by the rest of the world and depending on which reports you read, China certainly has some problems to address.   Whilst the good news for the property sector is that interest rates should remain low over the medium term, we realise many of our clients who have a major exposure to equities may face considerable volatility in the value of their portfolio.  Although we are property advisers and do not provide general investment advice, we have always acknowledged that investing in equities is a sound strategy and our position on this is not going to change.  In times like this though, peace of mind may be difficult to achieve and sound investment advice and cool heads will be needed.

We keep mentioning a secure, attractive rental income stream as we are firm believers of its merits.   Of course, we are also advocates of capital growth opportunities. Each client has their own needs and  it is all about creating the right balance within each individual portfolio.   As many readers of our property bulletins will know, we have been operating for over twenty years and our clients who bought properties, particularly in London, in the 1990s and later have benefitted enormously from rising prices.   They will continue to enjoy sound returns over the medium to long term, even if values ebb and flow according to market conditions.  However, the UK has now introduced capital gains tax for overseas investors and many investors are now turning to income producing properties to support their long term capital growth investments.  They realise that a balanced portfolio is becoming increasingly important and a healthy cash flow helps them sleep at night.

It is universally agreed that there is a shortage of properties in the UK and nowhere near enough houses are being built to meet demand.  In residential areas throughout the country there is strong rental demand as, good times and bad, people always need somewhere to live.  With interest rates low, house prices are continuing to rise making them unaffordable for many people.  The UK is developing a generation of tenants – people who simply can’t afford the deposit or don’t want to burden themselves with a huge mortgage.  The supply of tenants is growing every year and there is no likelihood of this falling.   This means a well located, low maintenance property that is well managed is like having money in the bank, except the income is better then the interest rate the bank pays!   And of course, rents and property values typically go up in line with inflation or better so the real value of the income is maintained over the long term.

Some investors will say that they don’t need extra income so a strategy of capital growth with a nominal income stream is ideal.    For many investors this approach works, especially for those who are not concerned when markets fall and are prepared to take a long term view.  However, some of us like the security of seeing money go into our bank account every month.  It is a very reassuring feeling and a real net return of 6% plus p.a.certainly protects the downside.

A steady increase in the value of the portfolio is called peace of mind. In turbulent times, it certainly has its appeal.

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Changes to UK inheritance tax and the housing shortage

Many offshore investors have historically made use of company structures to avoid inheritance tax.   However, the UK government has recently decreed that from April 2017 property in the UK, whether directly or indirectly, held by foreign domiciled persons will be liable to UK inheritance tax   This means they look through the structure to see who owns the property.  Company structures include a trust or a hybrid structure using both a trust and a company.

Given that the principal benefit of using a company is being removed,  certain investors may wish to review their current ownership structure.  There may be capital gains tax issues in doing so, but if they are caught by ATED (the annual charge will affect properties from £500,000 from 2016) it may worthwhile to do so.  A brief discussion with a qualified tax adviser would certainly be appropriate.

The government did not stop with inheritance tax.   The allowance for wear and tear on furniture used in rental properties is going to be withdrawn in 2016.  The government will release further information on this in due course.

The ongoing shortage of houses, planning problems and rising prices

The basic laws of supply and demand means that when there is limited supply demand increases and in the case of property this means rising prices. For a number of years we have been telling our clients that prices in the UK will rise over the medium to long term for this simple reason.  The UK government estimated in 2014 was that 240,000 to 245,000 additional homes would be required each year to 2031 in order to meet newly arising demand and need in England.  The following shows the number of houses actually being built:

 

The main issue holding back house building is the limited supply of land at the right price.  Most of the problems have been caused at a local level with councils and communities protecting vested interests and refusing / objecting to planning applications.

The politicians all say that if elected they they will rectify the problem, but the reality is that successive governments have not come up with a solution.  The current government is making all the right noises and is planning to overhaul the planning system including
A new “zonal” system, as employed in many other countries, which will give automatic planning permission on all suitable brownfield sites, removing unnecessary delays to redevelopment.
Power for the government to intervene and have local plans drafted setting out how housing needs will be met when local authorities fail to produce them, and penalties for those that make 50% or fewer planning decisions on time.
It all makes for good politics and the ultimate goal is an admirable one. However, whilst many people in the sector welcome the proposed changes, there remains scepticism that it will produce the desired result.  There is a Chinese proverb which says ‘The sky is high and the emperor is far away’ and it certainly applies when it comes to planning in the UK.  Policy statements from the central government are all very well, but it is the implementation at a local level that is the key to getting anything done.

Even with the best intentions, nothing is going to happen which will solve the problem overnight.  There will be a shortage for many years to come and this will continue push up prices.  Its the basic law of supply and demand and creates a sound opportunity for property investors.

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Short term development projects – what investors should consider before investing

We have been involved in property development for many years and follow some basic guidelines which we thought would be helpful to share with our readers. There is a general perception that the property development sector is the domain of larger institutions or special development companies and that smaller investors do not have access to it.  It is certainly true that historically, individual investors have struggled to enjoy the rewards the sector has to offer.  This is simply because of the high investment levels involved.  However, with the right structure and approach smaller investors can enjoy excellent returns from low risk projects.

When considering undertaking or investing in a development project it is worth noting the following:

The basics

  • Buy the right site
  • build it for the right amount
  • sell the units in the agreed time frame
  • for the agreed end values

Property development isn’t very complicated if the basics are followed.  The best approach is to take on a project that shows an acceptable return and then focus on producing that return.  Some people will argue that the aim should be maximise the return.  We disagree.  The aim should be to produce the profit that was deemed acceptable and not take unnecessary risks which would jeopardise achieving this.  We all want to make more money, but not at the risk of losing money.  It is all about preservation of capital with an attractive return.

The right structure

There are several ways a development project can be structured:

  • Investors buy the site with the developer acting as Project Manager on a fee/profit share arrangement.
  • Investors lend money on a secured basis to the developer, either as primary or mezzanine finance. This typically involves a set interest rate/return to the investor.

 

The suitability of the above will depend on the project and the wishes of the individual investor.
Detailed agreements should be entered into which clearly set out the obligations of the developer and protect the interests of the investor.

The location

Some developers believe there is always demand from more wealthy people so they focus on top end properties in prime locations.  Other developers argue that is always demand for standard family homes in medium income areas as this where the majority of people want to live. Developers at the low end will point out that there are always people looking to get on the property ladder and who don’t have mountains of cash to invest.  Each argument has its merits and it all comes down to individual preference.

The important issue is whether there will be buyers for the completed properties at the prices you expect in that specific location.  People live in high, medium and low income areas and the key is the demand that exists there.  If there is an over supply of properties, or vast tracts of land waiting to be developed, you may struggle to sell the properties which will affect the investment time frame and return.

The country in which the development is being undertaken should have a stable political environment, a good legal system and a transparent tax regime.  The investor is not going to live in the completed property so whether the lifestyle there appeals should not really matter.

Whether prices are rising in the location should not be the determining factor. The important thing is that prices are not expected to fall.   Any increase in property prices over the construction period should produce an enhanced return. See the danger of forward pricing below.

Forward pricing – avoid the temptation!

When compiling a feasibility study for a development project the easiest way to make it work is to inflate the prices that the completed units can be sold for.  This temptation must be avoided at all costs.  The question every investor should ask is ‘If these properties were completed and ready for occupation today, what would they sell for?’   The required return to the investor should not be dependent on prices rising over the construction period.   Of course, the properties may go up in value and be sold at a higher price and if so there should be an enhanced return.  However, they may not go up in value and the prudent approach is to base the investment return on today’s end prices. It means most projects don’t meet the expected profit requirement and therefore are not undertaken.  The good news is that the ones that do, will meet expectations.

Refurbishment or new build

It doesn’t really matter whether it is new build or refurbishment.   Some buildings need to be demolished, whilst some are structurally sound and can be refurbished.  It is less expensive to refurbish, but much depends on the specific project.  A general rule is that the more work you do on the property the greater the value you create.  Upgrading a kitchen or bathroom and adding a coat of paint won’t greatly affect the value.

A detailed budget

A detailed budget should be prepared showing ALL the costs.  This should be independently verified by an appropriately qualified person.  It should have an adequate contingency sum to allow for any unforeseen circumstances.  A fixed price building contract will reduce the risk considerably.  However,  this may prove to be more expensive as the builder will want to cover his risk by quoting an appropriately higher cost.

Independent due diligence

The following should be confirmed by an independent party before the investment is made;

  • Satisfactory planning approval
  • Construction cost and time frame
  • Professional services and fees
  • End sales values based on today’s prices

The right manager

Before you invest in a project you should confirm that the developer:

  • Has extensive experience in the sector
  • Knows the market in that location
  • Provides conservative estimates
  • Provides detailed and independent verification
  • Has formal agreements to protect the position of all parties

You will be entering into a partnership so it is important that you feel comfortable with the developer and his method of operation.

Summary

The above is just a brief note on some of the key areas an investor should consider before investing in a development project.  It is not exhaustive and each project will have its own set of issues and risks.  With the right due diligence and approach these can be minimised and the project will produce an attractive return for the investor.
 

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The five rights of property investment and why we chose Stoke-on-Trent

As many of our clients and followers will know, we are developing a block of 28 large self contained studio units in the centre of Stoke-on-Trent.  A number of our clients have asked why we decided to develop in this city.  London or cities such as Birmingham and Manchester would appear to have been a more obvious choice.  The answer is that we wanted to offer our clients a sound property investment at an affordable price and as you can see from below, we firmly believe we can do this our our Stoke-on-Trent development.

The common mantra of estate agents that ‘Location, location, location’ is the most important factor in property investment is too simplistic.     The key is to buy:
i)  the right property
ii)  in the right location
iii  for the right price
iv)  at the right time
v)   through the right adviser/developer.

We call it ‘The five rights’ of successful property investment and you will hear us talking a lot about this during 2015.   If investors follow this strategy  then they will have invested wisely.

So let’s consider London first.  This is a truly international property market and will produce sound returns going forward.  There will always be occasional blips, but international demand will keep pushing the market forward for the foreseeable future.  The problem for many investors is the cost of entering that market.  A decent one bedroom apartment in a central location will start from  £200,000 and even with a mortgage this is beyond the reach of many people.  It might be the right location, but if you can’t afford to buy the right property there then all of “The five rights’ have not been adhered to.  There is little point in buying the wrong property simple because it is the right location.

It is fair to say that many investors feel more comfortable with a bigger city. They imagine there will be stronger buyer and rental demand going forward simply because there are more people living there.  Unfortunately, this is not necessarily the case and much depends on the specific property and the location it is in.  The essential formula of limited supply and strong demand can apply irrespective of the size of the market.

Take Stoke-on-Trent for example. It isn’t the biggest city in the UK and it certainly hasn’t got the best scenery or football team. It is like a lot of other cities; it has a decent size population and the usual city infra-structure.  So why invest there as opposed to anywhere else?  The honest answer is that there is no reason whatsoever to choose it over anywhere else. Which is not say you should not invest there.  On the contrary, the important thing is that if you can find the right opportunity there then it is as good as anywhere else.   It is all down to ‘The five rights’ and if you can find a property there that is suitable then you can buy it with confidence.

So let’s take a look our Majestic Court development in Stoke-on-Trent and see whether it meets ‘The five rights’ criteria.

i)  The units are large self contained studios that will be modern and very popular with young professionals, students etc.  For that market, they are the right property.
ii)  They are superbly located adjacent to shops, restaurants and within easy walking of the railway station and the Staffordshire university campus , so they are in the right location.
iii) They are the right price for many our clients (under £60,000 and with a guaranteed tenant) and represent excellent value on a pounds per square foot basis.
iv)  The general UK market will always have blips, as will London, but the time to invest for the future is now, not in the future.
v)  Lastly, we have been operating since 1992 and firmly believe we are the right adviser to use (of course, you would expect us to say that but we actually believe that and so do our clients). Importantly, we are the developer and will provide a quality product that will meet our clients’ expectations.

When we found the opportunity in Stoke-on-Trent and carried out our due diligence we quickly realised it was a sound place for us to develop a quality product that our clients could benefit from.  We are extremely confident that time will prove us right.  Going forward, we will find opportunities in other areas and if they satisfy ‘The five rights’ then they will be worthy of consideration.

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The Costa del Sol or the major cities?

With the Spanish property market showing signs of recovery some of our readers have asked where in Spain they should buy and whether the oversupply in some areas will impact the recovery.   It is certainly true that there is still an oversupply of properties throughout Spain and this is likely to remain the case for some time.  The good news is that the number of unsold homes in Spain will shrink to 563,000 units in 2015, according to a report issued by the Spanish Realtors Association, in collaboration with the Institute of Business Practice (IPE) and the National Network of Qualified Property Consultants (RAIC).  This is a 40 percent decline from 2010.   It is worth noting that many of the homes are half built or poorly constructed in bad locations, with little chance of ever selling. It is all about buying the right property in the right location for the right price.

A commonly held view is that the major cities will be the first to see prices rise as foreigners snap up bargains there.  To some extent this appears to be happening, with agents in Barcelona for example, advising that up to 30% of sales are going to foreign buyers and prices are edging upwards in certain districts. The same is true of the Costa del Sol though, with foreign buyers rapidly returning there.

In the UK, London has historically out-performed the rest of the country in terms of capital growth.  Howere, in recent years this has not been the case in Spain.  The price of coastal properties surged 250%  from 1996 to 2007 as hundreds of thousands of foreigners, mainly from the UK, France and Germany, bought property.  Contrast this with the main cities of Barcelona and Madrid where prices rose 188% over the same period.

As you would expect with a property crash,  some areas were worse affected than others.   The Costa del Sol, which is on the coast and where prices are typically lower than the major cities, saw prices fall by as much as 50% as a result of the global financial crisis in 2007.  Barcelona and Madrid experienced a much less severe fall, with prices dropping by up to 30%.   Of course, such price falls are in general terms only and you can always find individual properties where the price has fallen more or less than these percentages.

Given the above, one could argue that the major cities are a safer location in terms of capital preservation – if prices fall they will fall less in these locations. However, given the state of the market the downside risk is not considerable. We believe the emphasis should be on picking the area that will show the best investment returns rather than which area will be the best for the preservation of capital. After all, with a limited downside the reason for investing in Spain is to maximise the return.

As indicated above, the price gap between the major cities and the Costa del Sol was narrowing between 1996 and 2007.  With prices falling further in percentage terms in the Costa del Sol, the price gap has now widened again with the major cities being relatively more expensive in comparison.  With foreign buyers returning to the Costa del Sol we may see a resumption of the previous trend where it out performs the major cities.

Whilst the major cities may or may not recover sooner, the issue for most investors is not which market will be the first to show price increases, it is which market will show the best returns over the medium term.  At the end of the day it is all down to the investment return over the period of time you want to invest. There is an over supply of properties everywhere, and more so in the Costa del Sol than in Barcelona.  However, it is all about buying the right property in the right location for the right price.  Both the Costa del Sol and Barcelona have properties that can satisfy those requirements.

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New stamp duty rates in the UK

The UK government has changed the stamp duty rates in its Autumn budget statement.  The changes, which are effective immediately, have drawn positive responses from most commentators and analysts.  It certainly benefits buyers of lower valued properties and penalises buyers of properties valued at more than GBP937,500.

Under the new rules, no tax will be paid on the first £125,000 of a property, followed by 2% on the portion up to £250,000, 5% on the portion between £250,000 and £925,000, 10% on the next bit up to £1.5 million and 12% on everything over that.

It is estimated that around 750,000 buyers every year will benefit from the new rates.   By contrast, the 17,000 buyers of properties valued at GBP925,000 plus will pay more.  The new rates will have the greatest impact in London and the south-east, which are likely to contribute around 75% of all stamp duty receipts. The changes are unlikely to have a major impact on the central London market.  Time has shown that buyers at the higher level will absorb additional costs and interest rate rises.  It is hoped that the new rates will end all talk of a ‘mansion tax’ on such properties, although this remains to be seen.

The changes are designed to help first time home buyers and people at the lower end of the income scale.  It is not often that a UK government makes changes to the tax regime which are universally praised.  In this case, they have and with an election next year it is not difficult to be cynical in terms of the timing. Nevertheless, the changes will benefit a huge number of people and are to be applauded.

It is worth noting that given the cost of property in the UK, more and more buyers are focusing on smaller units at affordable prices.  The dream home of a four bedroom, two bathroom house is rapidly moving beyond the reach of many buyers.  The acceptance of reduced living space applies especially to younger buyers.  Many of them don’t want to live on a large nondescript housing estate miles from a city centre.  They want to live close to major shopping centres, bars and restaurants. Sacrificing space is often necessary if they are going to achieve this.  The trend towards smaller, well located homes is set to grow for the foreseeable future and offers great opportunities for investors.

Sotogrande

Is Sotogrande the best residential development in southern Europe?

We have long had a policy that we will not offer properties to our clients unless we have seen them ourselves.   As we mentioned in a recent property bulletin, the Spanish property market is showing signs of recovery so Dan Wainwright, our UK director, and myself have just spent a week looking at opportunities in southern Spain.  There are certainly some great opportunities for both investors and owner–occupiers (holidays and permanent residents) to buy quality properties at the bottom of the price cycle.

One of the areas we visited was Sotogrande and it really is a great place to live. It  is located in the province of Cadiz, where the mountains of Andalusia and the River Guadiaro meet the Mediterranean Sea.   It is 30 minutes from Marbella,  only 20 minutes from Gibraltar Airport, one hour from the airports of Malaga and Jerez and very close to the cities of Granada, Seville and Jerez. It  has been carefully developed into what is now an outstanding resort. Its wide avenues, harbour, two beach clubs, world class hotels, colourful Marina, and every conceivable kind of service:

Banks  ;  doctors   ; lawyers  ;  shops  ;  restaurants  ;  car hire  ;  tennis and  padel tennis courts  ;  horse riding  ;  sailing  ;  art galleries  ;  craftwork and antique shops  ;  a colourful street market every Sunday.

The two beach clubs, El Octógono and El Cucurucho are located in unparalleled surroundings and both have direct access to the beach. The clubs offer members and visitors a range of unbeatable services and activities for children and adults.  The Sotogrande International School has been an IB World School since January 2000. It offers both a Primary Education Programme and the Diploma Programme. It is a private school, with English as the main language.

It is also a great sporting area with five superb golf courses including Valderrama,  the 97′ Ryder Cup venue, the Real Club de Golf and La Reserva de Sotogrande.  It also has eleven polo grounds of the highest level.  It is home to the first marina ever built in Spain, with 1,400 moorings of between 6 and 15 metres. It is often referred to as Little Venice because of the many canals and special atmosphere and it offers residents the option to have their boat moored right outside their home.

New build two bedrooms in the marina start from 350,000 euros and villas in the area start from around 550,000 euros.  There is good rental demand, particularly from people working in Gibraltar, and with the Spanish market set to recover now is the time to buy.  If you are looking for a lifestyle home and a sound medium term investment, Sotogrande may be the ideal location.

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Spain – bottom of the market and set for recovery?

In August 2012 we commented on the Irish property market and the fact that all markets recover in time and Ireland would be no different. This has certainly been the case, with prices in Dublin having risen over 20% in the last year. The recovery has also spread to the rest of the country with prices rising by 5% over the same period. Some analysts have even asked whether a price bubble is forming. This is for a property market that a short time ago many people were questioning whether it would recover in this decade, let alone the next few years! The same applies to the UK market. Like Ireland it fell as a result of the global financial problems of 2007/8 and took some time to recover. When it did, it took many investors by surprise and they ended up buying far outside 10% of the bottom of the market.

Over the past twenty years we have seen a number of ‘boom and busts’ and have learnt a couple of things that we keep reminding ourselves and our clients of – it is almost impossible to pick the absolute bottom of a property price cycle and all markets recover in time. It is a question of ‘when’ and not ‘if’. We firmly believe that if you buy within 10% of the bottom of the market you will have done well. If you buy within 10% of the top you will certainly not have done so. But getting the timing right is not easy. Markets seem to recover a lot quicker now than they did twenty years ago when we started our business. This is partly due to better communication channels (the internet, social media etc), which gives people easy access to market information. Unfortunately, this doesn’t mean it is easier to pick the bottom of a property cycle, it has always been extremely difficult to do that and we doubt that will ever change. It does however, help investors more quickly identify market trends and move quickly to take advantage of opportunities.

If you are looking for a medium term investment in a market:

that appears to have bottomed out and in any event should be within 10% of the low point of the current price cycle
offers security of title
an adequate legal system
access to market information etc
has an active secondary market
is not an emerging market
where do you look?
One country you could consider is Spain. The market there certainly crashed and the ‘doom and gloom’ commentators have said that there is an over supply of properties, no investor demand and no hope of recovery. Does all this sound familiar? We commented on the Spanish market in June and November of last year and fully acknowledge there has been an over supply and little investor demand. However, no hope of recovery? All markets recover in time and Spain seems to be about to do that.

It certainly appears that the market is now within 10% of the bottom of this price cycle. House prices dropped 3% year on year to June 2014, the lowest annual fall for 6 years. The data from Tinsa is the latest evidence of what commentators increasingly declare to be ‘the bottom’ of Spain’s housing market decline. The month of July saw price rises in several provinces, with the improvement being largely credited to foreign property investors buying on the coast and in major cities. These investors are looking to cash in on the highly depressed property prices which tumbled from their pre-crisis highs. This is particularly the case for Britons who accounted for 15% of all sales to overseas investors, followed by the French (10%), Russians (9%), and Belgians (7%). The Golden Visa scheme, which allows residency through the purchase of a property, came into force on the 30th September 2013 and has also resulted in increased interest from the Middle East, Asia and Russia.

Commentators are now becoming more bullish, so we can expect investors to increasingly return to the market. “We have already seen a staggering 2,500 per cent increase in Middle Eastern buyers this year versus the same period in 2012, and a 190 per cent increase in buyers from Russia and Lithuania.”, said Marc Pritchard, sales and marketing director for Taylor Wimpey España, in a report in Telegraph UK. This sentiment is supported by Myles Johnson of the Financial Times who said “Several large deals have been completed for assets that 18 months ago not even the most foolhardy speculator would have touched.”

The general economy is also showing signs of improvement. Spain has the 13th Highest GDP in the world and in 2013 it stood at approx. $1.4 trillion, with a per capita figure of $30,557 . In line with most countries in Europe and elsewhere, its economy was adversely affected by the 2008 global financial crisis. The government was forced to seek EU financial aid and introduce severe budget cuts which culminated in unemployment exceeding 20%. By 2014 the economy was on its way to recovery with 1.4% increase over the previous year. Exports mainly led the recovery which was aided by private consumption, an improving labour market and stronger confidence. Business investment is projected to benefit from the better economic outlook and higher exports. Higher activity will result in positive employment growth, but ample spare capacity will keep inflation low.

The above doesn’t mean that prices are going to boom overnight throughout Spain, but it does mean that in some areas now is the right time to buy and take full advantage of the up-turn.

main photp

Spain – bottom of the market and set for recovery?

In August 2012 we commented on the Irish property market and the fact that all markets recover in time and Ireland would be no different. This has certainly been the case, with prices in Dublin having risen over 20% in the last year. The recovery has also spread to the rest of the country with prices rising by 5% over the same period. Some analysts have even asked whether a price bubble is forming. This is for a property market that a short time ago many people were questioning whether it would recover in this decade, let alone the next few years! The same applies to the UK market. Like Ireland it fell as a result of the global financial problems of 2007/8 and took some time to recover. When it did, it took many investors by surprise and they ended up buying far outside 10% of the bottom of the market.

Over the past twenty years we have seen a number of ‘boom and busts’ and have learnt a couple of things that we keep reminding ourselves and our clients of – it is almost impossible to pick the absolute bottom of a property price cycle and all markets recover in time. It is a question of ‘when’ and not ‘if’. We firmly believe that if you buy within 10% of the bottom of the market you will have done well. If you buy within 10% of the top you will certainly not have done so. But getting the timing right is not easy. Markets seem to recover a lot quicker now than they did twenty years ago when we started our business. This is partly due to better communication channels (the internet, social media etc), which gives people easy access to market information. Unfortunately, this doesn’t mean it is easier to pick the bottom of a property cycle, it has always been extremely difficult to do that and we doubt that will ever change. It does however, help investors more quickly identify market trends and move quickly to take advantage of opportunities.

If you are looking for a medium term investment in a market:

that appears to have bottomed out and in any event should be within 10% of the low point of the current price cycle
offers security of title
an adequate legal system
access to market information etc
has an active secondary market
is not an emerging market
where do you look?
One country you could consider is Spain. The market there certainly crashed and the ‘doom and gloom’ commentators have said that there is an over supply of properties, no investor demand and no hope of recovery. Does all this sound familiar? We commented on the Spanish market in June and November of last year and fully acknowledge there has been an over supply and little investor demand. However, no hope of recovery? All markets recover in time and Spain seems to be about to do that.

It certainly appears that the market is now within 10% of the bottom of this price cycle. House prices dropped 3% year on year to June 2014, the lowest annual fall for 6 years. The data from Tinsa is the latest evidence of what commentators increasingly declare to be ‘the bottom’ of Spain’s housing market decline. The month of July saw price rises in several provinces, with the improvement being largely credited to foreign property investors buying on the coast and in major cities. These investors are looking to cash in on the highly depressed property prices which tumbled from their pre-crisis highs. This is particularly the case for Britons who accounted for 15% of all sales to overseas investors, followed by the French (10%), Russians (9%), and Belgians (7%). The Golden Visa scheme, which allows residency through the purchase of a property, came into force on the 30th September 2013 and has also resulted in increased interest from the Middle East, Asia and Russia.

Commentators are now becoming more bullish, so we can expect investors to increasingly return to the market. “We have already seen a staggering 2,500 per cent increase in Middle Eastern buyers this year versus the same period in 2012, and a 190 per cent increase in buyers from Russia and Lithuania.”, said Marc Pritchard, sales and marketing director for Taylor Wimpey España, in a report in Telegraph UK. This sentiment is supported by Myles Johnson of the Financial Times who said “Several large deals have been completed for assets that 18 months ago not even the most foolhardy speculator would have touched.”

The general economy is also showing signs of improvement. Spain has the 13th Highest GDP in the world and in 2013 it stood at approx. $1.4 trillion, with a per capita figure of $30,557 . In line with most countries in Europe and elsewhere, its economy was adversely affected by the 2008 global financial crisis. The government was forced to seek EU financial aid and introduce severe budget cuts which culminated in unemployment exceeding 20%. By 2014 the economy was on its way to recovery with 1.4% increase over the previous year. Exports mainly led the recovery which was aided by private consumption, an improving labour market and stronger confidence. Business investment is projected to benefit from the better economic outlook and higher exports. Higher activity will result in positive employment growth, but ample spare capacity will keep inflation low.

The above doesn’t mean that prices are going to boom overnight throughout Spain, but it does mean that in some areas now is the right time to buy and take full advantage of the up-turn.

One copy

Smaller units in the right location can be better property investments than regional houses

If the mantra of ‘Location, location, location’ espoused by many estate agents is to be believed, you should place greater emphasis on where the property is located than the actual property itself. While this approach is too simplistic to be adopted without qualification, there is certainly some truth in it. Buying the best location you can afford is usually better than buying the best property in a poorer location.

In 1994, when we first began offering UK property to Hong Kong investors, many of the people we spoke to would only buy two bedroom apartments in central London. London was relatively affordable and there was no need to look elsewhere. One bedroom units, even in London, were frowned upon as investments, primarily because in Hong Kong few people wanted to live in them. Although we pointed out that it is the demand for the product in the UK that counts, not the demand in Hong Kong, it was fair to say that demand for studio and one bedroom units was not as great as demand for two bedroom units.

Bring the clock forward twenty years and the position has changed considerably. The trend towards people living on their own has been growing for some time. Britain has become a lonelier place to live over the last 40 years with the number of people living alone almost doubling from nine per cent in 1973 to sixteen per cent by 2011. Of the 26.m existing households, 7.7m of them are occupied by one person.

The result of ever increasing property values in London means that it is now one of the most expensive places in the world to buy property. Numerous people who would like to live in zones 1-3 on the underground system can no longer afford to do so and a large number of investors have been frozen out of the market. These people simply cannot afford the standard two bedroom unit that has been the staple of the investment market for many years. This has resulted in smaller units becoming much more acceptable to both UK based buyers and overseas investors.

Tenants are in a similar position. They want to live in an area that suits them and if that means not using a spare bedroom as a storeroom, then so be it. They would prefer to rent a smaller unit than pay the extra rent or move to a less favourable location. With rent levels so high, empty rooms are increasingly regarded as needless and extravagant The good news for investors is that in many locations, both purchase and rental demand for studios and one bedroom units is as strong as two bedroom units.

The demand for smaller units is not restricted to one bedroom apartments. Studio units of at least 20 sq mtrs are now in demand from tenants and owners. Many single people and young couples, especially professionals, want a city centre residence and a large self contained studio unit is perfectly acceptable. This applies whether they are buying or renting. Naturally, you shouldn’t buy a studio unit in a sprawling suburban area where there is an abundance of larger, affordable accommodation. In a busy city centre there are strong grounds for buying one. It is an investment and we are not going to live in it ourselves. We simply want to rent the property we buy to the best tenant we can find, for the highest rent and then sell it easily for the highest figure we can achieve. A studio unit in say central London will mean a quality tenant and should show better capital growth (as you would expect from London) over the medium to long term than a house in the midlands.

So why don’t more overseas investors buy smaller units? There are a number of reasons:
1. Lack of knowledge of the demand for this type of accommodation.
2. Lack of availability – most developments offered to Asian based investors include a majority of two bedroom apartments
3. A desire to buy something they would want to live in themselves

Of course, the above means that many investors don’t buy in the UK. Prices are now so high they can’t afford to buy anything that meets their requirements. This does not have to be the case. The following shows what can be bought for far less than a typical central London two bedroom apartment and yet will still be a great investment in a great location:

1. £50,000 – £75,000: studio units for students and professionals in university cities
2. £75,000 – £150,000; one bedroom apartments in city centre locations
3. £150,000 – £200,000 – studio units in London zones 2 – 3
4. £200,000 plus; one bedroom apartments in central London zones 2 – 3

take away food red.

Equity valuations and income

Has the world gone mad? A British take-away food company called Just Eat has just made its debut on the London Stock Exchange. It was valued at £1.5bn, which is over 100 times its last year’s underlying profit, and it went up 5% on its first day’s trading. We are not investment bankers, we are property specialists, so it is not for us to say that it was not worth that multiple. To a lay man though, it is hard to see how a take-away food company is worth 100 times its annual profit. Apparently, the company is being positioned by its promoters as a technology play, which allows everyone to get very excited and the valuation to go up. This is not an isolated case. More and more companies and their advisers are taking advantage of a broad connection with technology and favourable market conditions to raise huge sums based on ever increasing multiples. Does any of this sound familiar?

A number of people have expressed the view that a technology bubble is forming. If they are right, then when the bubble bursts (they all do eventually) there are going to be a lot of people suffering huge losses. Unfortunately, there is a very real danger that other sectors of the stock market will be dragged into the mire. Which does not mean that there are no sound equity investments out there. However, it does reinforce the need for a balanced portfolio so that investors are not over exposed to equities.

‘Income, income, income!’ is the dominant investment strategy for many astute investors. In times of over excitement in equity markets it is easy to see the attraction of a secure and attractive income stream from an alternative asset class. Sure, rising stock prices means paper gains and if you choose the right exit point (oh, how we all wish we could do that!) or adopt a long term hold strategy then there are sound profits to be made. However, putting hard cash in the bank every month is never a bad strategy and it appeals to most of us.

When you can get a net yield of 8% p.a. from a property, why would you not invest in that asset class? Of course, some people like immediate liquidity and yes, property is less liquid than equities. Importantly, though, there is always a buyer for the right property. If you are buying equites for the long term and the market drops are you going to sell or will you continue to hold? Most passive investors don’t panic and they decide to hold. For them, immediate liquidity is not required for all of their investment portfolio and property may be an ideal investment for them.

So where can you get an 8% p.a. net yield? UK student accommodation is the obvious answer. There is going to be a shortage of student accommodation for many years to come, which will result in a steady and attractive income stream for investors. If you believe that income is important or you want to re-balance your portfolio, this is a sector you should invest in.

Spain - flag

Fortune favours the brave property investor as Spain launches Golden Visa

They say the darkest hour is just before dawn and that is certainly the case when it comes to the Spanish property market. It is in a severely depressed state with an over supply of properties in some locations and little demand from domestic and overseas buyers. Many value buyers will see this as an opportunity to buy a quality property at a heavily discounted price. Property experts are predicting a boost for the Spanish property market with the country’s new ‘Golden Visa residency investment visa set to attract a lot of buyers from outside the European Union. However, as you will see below, for every ‘bull’ there is a ‘bear’ out there.

The long anticipated ‘Golden Visa’ legislation granting non-EU nationals automatic Spanish residency if they buy suitable property investments will certainly impact on the market. This has now officially been made law after being published in the state Gazette (BOE). This opens the door to thousands of potential investors spending a minimum of €500,000. Whereas traditional buyers have been the British, Dutch and Germans, this could change with estate agents reporting a rise in interest from buyers from the Middle East, Russia and China. These nationalities have already been snapping up properties in anticipation of the new law, which is retrospective. The law will allow those who have already bought to benefit from the residency rights which allow them to stay in Spain for 12 months compared with the current 90 days and a further residency permit that is renewable every two years

The visa is set to boost the prime property market in Spain according to Knight Frank. Its latest residential insight report says that prime markets are on a firmer footing with some more affluent second home hotspot reporting price growth for the first time since the onset of the global financial crisis. According to the Knight Frank report Mallorca, Ibiza and Barcelona are leading the way and it is hoped that investors from Asia and the Middle East in particular will shore up some of Spain’s more oversupplied markets as a result of the investor visa. ‘The outlook for Spain’s luxury housing market is improving. Both the volume of enquiries and agreed sales have increased in the first half of 2013. Spain’s prime markets are attracting a broader range of international buyers who have the confidence and finance in place to purchase. Buyers previously looking in neighbouring European countries are seeing value in Spain and in particular the Balearics once more,’ the report says.

The report also reveals that Madrid is increasingly on the radar of international buyers with interest from buyers in the United States, Mexico, Colombia and Venezuela. Knight Frank’s associate office in Barcelona recorded more sales in the first half of 2013 than in the whole of 2012. Mallorca‘s recovery is also evident across most price bands but particularly below €600,000 and above €2 million and Dutch and Belgian buyers are increasingly active in the prime Ibiza market. Sales in Marbella rose 21% in 2012 year on year and there has also been interest from French buyers as a result of French President Francois Hollande’s policy on wealth tax. The report points out that Sotogrande remains a firm favourite with Madrid’s wealthy and Gibraltar’s business community. Popular areas include Sorogrande Costa, the Kings and Queens area and large plots close to the Almenara Golf Course

With the aftermath of more than a decade of debt-fuelled speculation is still taking its toll, not everyone is relying on the Golden Visa to cure the problems of the Spanish property market. Since the start of the year, foreign investors not seeking residency have begun to return to the Spanish property market for the first time since the crisis hit in 2008. Several large deals have been completed for assets that 18 months ago not even the most foolhardy speculator would have touched.
The question many people are asking is whether this increased interest from supposedly ‘smart money’ is an indication a floor has been placed under the property market, or whether such deals are simply speculative bets on heavily distressed assets. A rush of deals from private equity groups has been used by supporters of both sides of the argument to justify their case. Since the end of summer a number of real estate portfolios have been sold to more adventurous private equity buyers such as Blackstone and HIG Capital. The latter has bought a stake in the first large package of property assets put on the market by Sareb, Spain’s so-called “bad bank”.

A number of factors may be cited for the jump in the number of property deals, after three years in which almost no transactions took place. One has been the creation of Spain’s state-organised “bad bank”, which took €54bn of troubled property loans from the balance sheets of the country’s nationalised lenders. Sareb has begun to place these assets into portfolios to be sold to investors, which has helped generate confidence that a floor may have been set on prices . Another factor has been a wave of government-imposed provisioning rounds, forcing reluctant banks to write down the value of their bad loans and to raise capital to cover the expected loss. This has encouraged lenders to begin selling off assets at prices low enough to tempt foreign investors back to the negotiation table after years of denial and reluctance to accept large write downs.

Of course, in spite of encouraging signs, there is no guarantee that the good times are about to return. Spain has a stock of 650,000 unsold homes, according to its ministry of public works, with average prices having fallen by 30 per cent since the start of 2008. Nevertheless, some people believe the worst is over and now is the time to enter the market. ‘Fortune favours the brave’ and in this case, there are reasons to believe this will be true for Spanish property

Thames- bridge

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.

Chelsea

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.

Spain - flag

Spanish property market – is now the time to invest there?

We are often asked whether now is the time to buy an investment property in Spain. The answer is not as straight-forward as many people think. Some astute investors, including large institutions, are looking at investing there and are driven by distressed prices, an attractive rental yield and a weak currency. One essential ingredient to make it a great property investment is missing though – rising house prices and therein lies the dilemma facing the investor.

The economic situation is certainly not good at the moment. The economy is expected to contract by over 1% in 2013. Unemployment is rife, with youth unemployment at over 55% and there are ongoing talks with the EU over how to reduce the country’s budget deficit, which is likely to cause further pain for the market there.

The Spanish residential property market has seen prices fall by up to 40% since 2008. It is estimated that 500,000 home owners are in a negative equity situation and the government has had to pass laws to prevent banks repossessing homes and evicting families. However, the government is less inclined to help developers and banks who are sat on a large number of unsold homes. Both are being forced to sell at distressed prices, sometimes at up to 70% below their 2008 peak. This is not going to solve the problem overnight though. The international credit rating agency Fitch estimates there are more than 1m unsold homes in Spain, including hundreds of thousands of newly-built properties.

New construction has also been affected. In 2006 over 750,000 new homes were built. In the last two years it has been less than 100,000 per year. There is no point in building new homes if there is no demand and too many houses are already available. Developers didn’t grasp this point when they were building homes in expectation of future demand. A dangerous strategy that has now come to haunt them.

Unfortunately, house prices are showing no signs of recovery. They fell by 11% in 2012 and are expected by fall by around 10% this year. The good news is that some people expect the market to stabilise next year as the steps taken to assist the economy and re-structure the banking sector begin to take effect. Having said that, it is difficult to see when prices will actually start rising again.

One point supporting the argument now is the time to invest there is the relative weakness of the Euro. If the Euro strengthens over the next three to five years as the economy there improves, which many people expect it to, then the currency gain could be attractive.

If you do buy a property, there are fewer lenders who will finance overseas buyers in Spain. If you can find one, the maximum LTV is likely to be 60pc with interest rates starting at 4.5pc.

Some good news is that you will find the rental market is sound in the major cities and residential areas, but less so in some of the over-developed resort areas. Gross rental yields of around 4% p.a. should be achievable and of course, if you buy at a distressed price your return may be substantially higher than this.

For those seeking somewhere to live, the Spanish government is about to offer permanent residency to people who invest at least 500,000 Euros in the property sector. The program has been discussed for some time and it was originally muted that the figure would be 160,000 Euros. The sum appears to have gone up, but final details will not be available for several more months.

In summary, Spain may be viewed as speculative, opportunist market where some investors will make a great deal of money and some will sit on a non-performing asset for quite some time. However, if you buy the right property in the right location for the right price there isn’t much downside. This is especially the case if you are enjoying an attractive rental yield and an appreciating currency – both of which may be applicable in the case of Spain.