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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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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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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.

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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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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

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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

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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.

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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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.