Head of Real Estate Advisory at Coutts assesses the risks and opportunities of the current British property market. Allow me to provide you with investment tips and several guidelines coming right from the Queen’s bank.
Following a time-period where gains were focused in London and where most other regions experienced declines, we now think that property prices in the UK are on the rise again. There have been several government measures recently to make new mortgages more accessible to a broader populace, this will support the housing market and will also benefit the British economy as a whole. The issue, then again is that the prices go up from an already high level which makes clear the importance of continuing better availability of affordable finance options.
As of now, it can be said that residential property in the United Kingdom stands at more than fair value. To get a better idea here, it is always good to look at the relationship between nominal gross domestic product (GDP) and the prices of houses in comparison. Those prices have usually kept track with the growth of our nation’s GDP for many decades and they have likewise reflected all trends in the British economy. Looking at it from that perspective, home prices have been above average for over a decade now and are now sitting at about 9% above their average value measured against nominal British GDP.
Here it is also noteworthy to mention that availability did not go up significantly during the preceding boom.
The question might come up how this market sustained such overvalued levels and kept stable through the global financial crisis that can be seen in markets everywhere else. The scarcity of homes in the UK with a staggering high demand is without a doubt one factor. This is not the case in many other countries. In addition to that, availability kept at the same level in recent years.
One could look at the United States where new homes outstripped the increase in households by 4% due to a boom in new construction about twelve years ago. In contrast, the United Kingdom saw much less homes built, about 50% of the United States percentage and then furthermore had to start with even less property available to begin with. Even though property in the UK is outnumbering households, this property is not there where it is actually needed. London and Great Britain’s South-East are still seeing a significant shortage. The result of this is a constant lack of availability with an ever-increasing cost of rent.
Even with home prices above average, prices have gone up in the UK. A key factor is affordability, which has improved as interest rates have fallen to record lows. The cost of borrowing is not even the issue at hand here, it is the fact that many people today cannot afford the required deposit to get affordable mortgages which makes purchasing out of the question for many.
Investment in residential property means entering the rental market for the purpose of rental income, or capital gains. In 2012, landlords in the United Kingdom acquired more than 70,000 homes for that purpose, the highest number seen in the nation since 20007. Some area markets have better yields than others and prove attractive for those who want to invest while the 4-6% gross yields in the south-east reflect greater competition for assets and the historically better prospects for longer-term capital growth.
In the last five years, private rented households across the UK rose by 1.15m. It is projected that another 1.1m households will have joined the lucrative private rented sector within a couple of years which will then amount to just under six million households. If one takes the average rise in rent into account, this will increare rent paid within this market from £48bn two years ago to £70bn in a mere five years.
Why the outlook in the UK remains positive for the rented sector and why it could be advised to make use of it as a residential investment:
With more supporting plans by the British Government, the demand from tenants looking to buy is stimulated towards purchasing. As a result, demand for property will increase and so will prices. The returns from residential investment are likely to be driven by capital gains in the short term.
Latest statistics show that the UK’s population is increasing at four times the rate of new households which adds to an ever more scarcity on this market. This pertains certainly to areas in the UK such as the South-East and then in particular to all the major cities.
What are the risks on this market?
Without a doubt, current housing costs in the UK are very high sitting at an all-time above average of 9%. London’s prime property is particularly expensive and brings down overall revenue if one looks at purchase prices as compared to income from rent. Another factor playing a role here is stamp duty that comes in for prime property worth more than £2m.
Several government initiatives with the aim to help this market are to expire in a few years. As a result, the housing market in the UK will be subject to government policy as well as interest rates.
Rents are always directly affected by the economic situation and will mirror slumps and downward trends. Likewise, they will be affected by wages and inflation. Economic growth is projected to remain weak, although it may improve somewhat in the second half of this year. Interest rates are not expected to go up significantly until 2014 as the BoE supports the weak recovery with accommodative monetary policy.
What Investors Can And Should Do – Words of Advice
As an investor, you are not looking for a home that appeals to you but for your tenants. You are not the target market. Always select property with your tenants in mind and do not make this a decision based on your opinion how a home would be fit for you personally.
Proper selection of property is key. Identify your market and choose accordingly: Students will have other requirements in terms of property size, location and so forth as opposed to professionals or working commuters. Is the property suitable for your targeted market? Have that always in mind before you buy.
Don’t overlook factors such as transport links, schools in the area, shopping centres and similar when you select property to invest. It is often such factors which appeal to an audience and which can make a property into a good investment.
A letting agent can be very helpful if you are just starting out investing. Have them guide you with all required procedures. They can assist you to find the right property for the appropriate tenant market.
Seasonal price changes can be beneficial. If you purchase in winter it can be worthwhile due to cost savings at a time when the market is illiquid.
Your investment returns will always be lower over time, consider this when purchasing newly built property that will often have a premium price tag.
Take into accounts factors which could deter potential tenants. Among those can be basement flats which are frequently avoided due to a lack of light, security concerns or the higher noise levels.
Keep your expenses reasonable. An outbid by someone else can occasionally happen. Don’t let your investment become a game were you need to overpay to get a property. Rather than engaging in a bidding war, select another property and do not go over your reasonably planned budget.
Consider prime locations in major British cities. Although a higher investment, such property holds their value best even in an economic crisis.
Furnished property is not a money maker. The majority of people are not willing to pay extra for furnishings. In addition, it can lead to added expenses any time furnishings will have to be replaced later on.
Do not overlook the cost of your monthly mortgage payments. Assess rates and flexibility and also take into account vacancies when calculating your income, along with interest rates. This will help to keep the costs of borrowing reasonable.
Investing in property for renting will always mean running costs. Attempt to mitigate your regular expenses. Spread costs evenly across a number of properties and utilize your own skills if possible.
Keep track of your finances. At all times you want to be current in regards to actual costs, losses and revenue.