PropertyInvesting.net: property investment special reports: 249: What's next?

249: What's next?

01-24-2009

PropertyInvesting.net team

There are no real concrete signs of recovery as yet. Probably the closest that came recently was from Rightmove.co.uk that reported the number of new properties on the market has actually gone down to 45,000 whilst the number of new buyer enquiries had shot up to 450,000 in December – almost double the level of a year earlier. The skeptics will say that an enquiry is only an enquiry – serious buyers with funding secured are a dying breed and the drop in new homes coming onto the market is a response to declining prices by people that are not forced to sell – meanwhile repossessions are in beautiful-cottage-england creasing at a rapid rate, some 100% in a year.

Much will depend on how quickly banks seriously start lending – and reduce deposits that are required. Indeed, we seem to be about half way – or possibly a little further – through a major correction in the market. Most people are predicting peak to trough falls of some 30% - some even thing it could be 50%. However, the set against a 280% increase over 10 years in many areas (e.g. London, southern England, University cities, nice country market towns and seaside towns) is still favourable when compared with the FT100 stock market that is lower now than it was in 1997, despite inflation averaging about 3% per annum.

There are some massive fundamental stimuli that have been put in place for a recovery:

Interest rates have dropped from 5.75% to 1.5%
Oil price have dropped from $147/bbl to $42/bbl
UK sterling has dropped from 1.9 $/pound to 1.38 $/pound
Tax cuts announced in November
Capital gains tax reduction from 40% to 18% from April 2008 onwards

Please do not under-estimate the economic impact that the above are likely to have. Everyone will see their borrowing costs drop – people who keep their jobs will start to notice more money in their banks – and if they start spending it – which is quite likely – consumer and business confidence could rise quickly – say by mid 2009. Most people with variable mortgages should see payment drop from 7.5% to about 3.75% in the space of about 16 months. That's a halving of payments.

The Bank of England are no doubt monitoring any green-shoots of a recovery, and if they don’t see any, which is the case up until now, they will start buying asset backed securities. They will continue bailing out banks - nationalizing them (unfortunately with tax payers money). If this does not work – to put it bluntly – they will start printing money. Yes – they are trying to re-inflate the economy. They will do whatever they think it takes to avoid deflation, and mass unemployment. Years ago, the market dictated how deep a recession would be. It seems these days, governments want to control the economy more and are happy to nationalise to creat short term stability - unfortunately at the expense of long term borrowing and health balance sheets. This is rather false in that it props up poorly performing business entities - that said, it prevents a more widespread contagion and mass unemployment - in the short term at least.

lovely-fireplace-model

The big threat will be the whole thing gets out of hand and inflation rapidly rears it's ugly head again. This is quite possible quite quickly. Particularly if oil prices start rising quickly again – property investors need to wacth out for this eventuality. As previously advised, any oil price over $70/bbl is into danger territory – and yes, no wander financial markets crashed shortly after oil rose to $147/bbl in July 2008.

We believe the next crisis around the corner will indeed be inflation – and the boom-bust cycles (with oil price boom and busts) rather re-imminicent of what was experienced in the 1970s and early 1980s. Property assets are good to hold during inflationary periods because any money invested is leveraged up and – as long as property makes a good yield and the investor can afford the interest payments - asset prices should at least broadly follow the inflating trend. Savings though – and cash – would decline in value – as savings rates are low compared to the inflation.

So we rather expect a recovery to gain momentum from mid-end 2009 onwards – but inflation to appear again quite rapidly - thence the Bank of England will pull the trigger on a big set of interest rate increases. The best hedges against inflation are gold and oil. Property is not bad eith olympic-stadium-stratford er – as long as the boom does not turn to bust. The strategy is – if and when there is another boom – you need to position to exit (or partially exit) as soon as you see inflation starting to hit, and before interest rates go shooting up. We regret this all sounds rather reactive – but we are entering uncertain times and without some foresight, forethought and planning – we property investors can get ourselves into a pickle.

So what’s certain? Not much, but a few things in the UK that we believe have some certainty around them:

London Olympics 2012 – regeneration of East End
East London Line rail extension – 2010
Eurostar – fast commuter trains to Ebbsfleet, Folkestone, Ashford, Stratford

Hence our London property hotspots map stays as relevant as ever – the news that Keira Knightley has just bought a £2.5 mln pad in Shoreditch is a good anecdotal indicator of the popularity of the enclave of london-fulham-terrace-house London – close to City of London, West End, Olympics, City Airport and the Eurostar at St Pancras and Stratford. Despite all the gllom coming from the financial institutions of the City, UP GDP in the financial sector only dropped 1% last quarter, whilst business services dropped 0.5% - and as we have been warning – the big loss was in manufacturing with a massive -4.7% drop. Manufacturing is in general in the Midlands and North of England. So London is surviving better than most other areas up until now, and will probably be the first out of the recession as business/financial services start to kick-up again and the four pronged stimuli finally manage to kick-start the economy.

So in summary, we would only invest in London at present – with focus in the hotspots areas. We would currently avoid areas with second homes, manufacturing areas and areas with many public sector jobs – with regret this wipes out most of the UK – there may need to be cut in the next few years as the Chancellor runs out of money (or the Tories get into power and cut back public spending). We would try to invest in areas with big new infra-structure development, new jobs, construction and regeneration. Hence some examples of favoured areas are:

london-curtain-road-shoreditch-boom-regeneration-olympics-2012

Bow
Stratford
Shoreditch
Limehouse
Brockley
Whitechapel
New Cross Gate
Forest Gate
Forest Hill
Woolwich
South Hackney
Haggerston
Kings Cross
Elephant & Castle - north Walworth

Location is key of course - nice Victorian property very close to new or existing tube, rail, offices and amenities are the preference. This will increase rental demand and asset value increases, particularly if the property is in a quite and relatively safe-low crime neighbourhood.

london-property-hotspots-map-2012-olympics-regeneration

We hope this special report has helped you. In summary, what out for the end of the crash, then an inflating economy. Avoid manufacturing and public sector exposed towns, cities and country areas. Focus on infra-structure re-generation preferably in London. And use $100/bbl oil as a trigger to re-adjust and sell down. And if you get really spooked by inflation, buy gold and oil.

More Special Reports:

For further property reports regarding oil prices and peak oil, please click on the following report:

191: Oil Price Update and Real Estate

187: Real Estate and the commodities super-cycle

186: Oil price starts to skyrocket as predicted - how to profit

180: Oil prices continue to skyrocket

172: Make serious money - best investment sectors

169: Oil supply crunch begins… protect yourself

168: Alarm bells ringing – oil price shock now on the horizon

163: Making Serious Money as asset prices plateau – resources and property

161: Resources winners and losers - ranked list for property investors

160: Find out the winners and losers in the biggest oil boom in history - about to happen...