PropertyInvesting.net: Property Investment Special Reports

87: Buy to let outlook for London and England - will prices keep rising?

PropertyInvesting.net Team

Traditional UK Buy-to-Let investment remains propular - the vast majority of investors purchase second hand property - flats, houses and terraces in citties, towns and suburbs, along with holiday lets. Finance is becoming more readily available and restrictions if anything are being loosened for investors, particularly those with large portfolios. 

Gearing – 13% money down

We understand Northern Rock allow you to put a 13% deposit down on a buy-to-let in the UK. Properties need to be in blocks less than 5 or 6 stories high, more than 80% privately owned and not HMOs. So if you have £130,000 cash, you could buy a portfolio of £1 million (or ten £100,000 flats). If the price of your properties then rose by 13% - the performance of many parts of London in the last year – you would have a 100% return on investment in a year. For a bank to offer 13% down on a residential property investment means they must see UK property investment as relatively low risk – not much more than private property purchase. This must mean they have great confidence in residential Landlord – or buy-to-let investors. Over the last ten years, the number of defaults and arrears by landlords has been minimal – so this offer is probably a reflection of this history of success in buy-to-let so far.

The City High Fliers  - what will they do with their bonuses?

Now, if you were a city high flier who was earning say £200,000 gross with a bonus of net £110,000 that was due to arrive in January 2007, what would you do with this cash pile? Would you buy stocks and shares with zero leverage and risk profile, or use the 13% money down mortgage offer, leverage up with relatively a low risk UK property investment and develop a further £1,000,000 worth of total investment? Not easy to see why property prices in London keep rising! And if they rose 6.5% in 2007 and the same in 2008, the city high flyer would double his/her money in two years – 50% annual rate of return.  

First Time Investor – pitfalls to watch out for

For the first time buy-to-let investor, that is keen to start off on the right foot, a few tips and pitfalls. Most property investors have made their money from purchase of second hand properties – few specialize in off-plan purchases (only 2% of total buy to let purchases). Off-plan is best in a rapidly rising house price market for new-build property, in developing areas. When an area is mature, because fees have to be paid, it far more difficult to make money quickly, unless you have an inside line of the very best deals – e.g. buy in a consortium of investors who leverage to achieve a good price from the developer. Being a first time investor operating in isolation, you will not have access to these deals unless you sign up to companies such as InsideTrack. These companies provide some training course but initial subscription to these clubs can cost upwards of £5,000 – so if you only purchase one property, you may not get your money back in the form of a return.

If you purchase you first property, you have to make sure it is for a very good price – if you target some 10% below true market price in a popular area – then your risks reduce dramatically. If the property can be easily upgraded at minimal cost to add a further say 10% to its value, then your risks will reduce even further. So if you put down a 15% deposit on a £100,000 property that is actually worth £110,000 – then spend say £2000 on painting and upgrade which boosts its value to £120,000, then you will have put in £17,000 and have net equity of £18,000 – on paper, already over 100% return on your investment. These types of numbers can be developed into personal targets that you wish to stretch yourself to achieve.

Make sure that tenant demand in the area is good, and the market for re-sales is okay. If the property is within 5 minutes walk of a train station, tram, tube and preferably on a major bus route, this will help. If it’s a rural property, being close to a major road and motorway will help, but not too close for road noise to be an issue. The best locations are close to busy thoroughfares, shops, amenities and supermarkets, but in very quiet side streets. Victorian properties are generally more popular for resale than newer post war properties. Edwardian and Georgian properties are often even more popular – particularly if they have some architectural merit or are in a conservation area.  Another key criteria to consider is “is the area positively changing” – for example, is there a major regeneration programme, new road or rail links, new offices and jobs, more wealth entering the area. All these aspects will help reduce your risk.

We’ll give an example – Shoreditch just east of the City of London has some 2 bedroom ex-council flats for sale at £180,000. You spot one undervalued at £174,000 then offer £168,000 for a quick sale – this is agreed – with 15% deposit. You spend £2000 and decorate it yourself and install a new low priced kitchen. Your work has transformed he place – you have it revalued for £185,000. You then release the spare equity in the form of a further advance of £14,000 after costs. You then use this to purchase a studio flat in a cheaper area for £95,000.

Now – the City of London has a huge number of jobs. The Docklands has a huge and expanding number of jobs. Access to the West End is good and the jobs here are booming. Meanwhile, Stratford and the London Olympic site are only 1½ miles away. The new Kings Cross Eurostar terminal is only 1 mile away. And the expanding City Airport is only 2 miles away. London’s population is forecast to grow by 600,000 in the next 10 years. 60,000 Eastern European workers have arrived in the city in the last 2 years. The bank/services sector seems to be doing well – and local wage earnings are rising at 3.5%+ per annum (more of the city bonuses are added). Because traffic is getting worse, more and more city slicker will require crash pads. Wealthy individuals will want pied-a-terre. The are 100,000 students in 10 colleges within a radius if 3 miles – only a ¼ of them live in student halls. The council estate is coming up, and is surrounded by many new builds costing £350,000 plus. You think to yourself – is this a high risk investment? Can you see tenant demand being satisfactory? You say to yourself – if this does not work, what will? You decide to buy your first investment property.

Can house prices rise by 30% in the UK 5 years?

Interesting article which tends to go against conventional thinking. PropertyInvesting.net believe it is possible for prices to rise another 30% in five years if:

• Inflation stays at or below 2.5% (oil prices below $75/bbl)
• Interest rates stay below 5.25%
• GDP Growth is maintained at around 2 to 3% per annum
• Unemployment does not rise significantly 

The reason why this further rise is possible is because there are approximately 180,000 too few homes being built in the UK each year. In southern England, earnings growth is about 3.5% without bonuses – and hence disposable income staying flat or rising. There are more and more single person households are far too  few houses being built. Multiples of loan amounts is increasing as is the length one can get a mortgage. Repossessions stay low and banks view private owner occupiers as relatively low risk. The population of the UK will expand by 5 million in 20 years and London by 600,000 people – roughly 8%. Owner occupier aspirations remain high. Babyboomers will give their offspring deposits for property purchase to avoid inheritance tax. So it’s not too difficult to imagine prices rising a further 30% in 5 years, particularly in the fast growing economic areas of southern England and London, plus regenerating areas such as Leeds, Bradford, Blackpool, Manchester and Liverpool.

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