UK Real Estate

The Christmas break is a great time to look back on the previous year, work out what you did well, what could have been better and reset your goals for 2009.

It is the ideal time to review your personal goals, property goals and any other business goals. And crucially make sure you write them down! This will make a significant difference in how you do overall this year. Like many property investors I have seen some values drop, and some properties cause more issues than others, but have also seen big positives with such dramatic drops in borrowing rates. I also think, more than ever, the last 4 months of 2008 made me even more glad I invest in property rather than

a) Not invest in anything or
b) Invest in the stock market or a traditional pension.

While some of the property headlines are pretty negative this is understandable but it is all relative. Compared to the FTSE top 500 companies which saw drops of 33% over the last 12 months ie most pension funds saw a drop in value by a third, the UK property market dropping by an average of 12% over the last 12 months is a significant difference.

Within that average as always the most affordable parts of the UK did better eg Scotland dropped by just 2%, and areas such as Hull, Hartlepool and Cumbria all dropped by less than 5% as an average over 12 months.

But also remember if people didn’t need to move they generally didn’t move – the majority of people selling in the last 6-9 months were those who were “distressed” sellers or had to take a low offers – which was always going to have dramatic knock on effect on average prices – but this doesn’t clearly tell us the full story on affordability – and until probably later this year it is hard to say what true values are in many areas.

What is for sure, as soon as more credit comes back in, and there are clear indications this is continuing to improve, then low offers will be less likely to be accepted.

No one forecast such large credit restrictions in 2008 and the knock on effect in certain property markets, and it is hard to be sure what will happen in 2009 but one thing is clear – affordability and attractive rental yields are at the best they have been in the UK for the last 3-4 years.

Gross rental yields, which were at around 5-6% a year ago, are now at 6.5-8% due to prices dropping and rents rising in many areas.

Prices may have dropped by around 12% as an average across the UK, but if you have a varied portfolio say spread across the UK and a couple of emerging markets, your overall yield should have risen with borrowing rates dropping and rents rising. Compare this to owning shares in large companies, where it is unlikely dividends will have risen as they will often be cash poor with cashflow issues.

This makes buy to let more attractive than ever in the UK and markets such as Czech Republic!

So how long will these opportunities last?

Six months? 12 Months?

Already borrowing rates are improving, with libor rate down to under 3%, and several lenders are close to increasing the LTV they will lend, as long as rental coverage is there. It is great to be able to find deals again where you can invest for very little funds and make over £100 net a month!

I have spoken to 1-2 investors who have said they are looking to wait 6-9 months when they think prices will be lower.

Most people saying this have no real reason for saying this, apart from the fact they have read this may happen in the newspapers – and have no real way of measuring this as are not too close to the actual numbers – but it allows them to put off making a decision for a while – bit like saying I ll get fit in the New Year! Often people who would say this would not understand what is good value and what is not – and you won’t learn this in the newspapers! You should have your own clear idea on what is good value based on rental return and local affordability.

The main reason it is daft to wait is if you can buy an investment property now, for 20% below today’s market value ie perhaps as much as 30% less than last years value, tie up very little money in the process and have positive cashflow why risk waiting?!

When the bottom of the market is called it will probably be 2-3 months after the actual bottom of the market has occurred and if everyone suddenly realises the value of their property in these high yielding areas, and mortgages are more available, then you won’t be able to negotiate a 25% discount any longer that’s for sure!

Actually as soon as 85% mortgages are back, vendors will be under less pressure to give big discounts.

Let’s look at an example:

Say, you can buy a 2 bed property that last year valued at £110,000, and now values at £100,000 for an equivalent net price of say £80,000.

Let’s say the rent is £525 a month and the mortgage is £300 and other monthly costs are £100.

We can package this deal so you are only tying up £6000 in total to buy this property – and the average salary in the area is currently £24,000.

Why is this a great deal and I’d buy these all day long?

Well firstly why do I look at average salary in an area? This gives us an idea of the realistic value of property in the area – at 5 times the average salary here this property could be worth £120,000. Even at 4 times the average salary it would be worth £96,000. The average property price in the UK – even with the drop in values last year is at around 7.5 times the average salary – which I think is still quite high – but working to say 5 times in your local area gives you a good idea of the properties true value.

Let’s look at rental coverage. You are looking to buy this as a buy to let, so you want good rental coverage. Lenders have realised they were daft to lend based on 100% rental coverage previously ie the rent just covering the mortgage payments, and now want at least 125%. On the above example, the rental coverage is a massive 175%! Ie 300/525 – so lenders are more than happy, and it also gives you a good insight into the fact that it will continue to be attractive to investors – even if you refinance in 2-3 years time and go again! (If any of this is unclear, give me or my team a call and will be more than happy to go through in much more detail – on the phone or at one of or free One to One consultations across the country.) .

If you don’t have a pension and say have £15-20,000 the best thing, in my opinion right now would be to buy 3-4 properties like above knowing you will have some instant equity and an ideal leveraged investment that is well priced and will rise in value over the next 3 years.

If spend £6000 and are given £20,000 equity based on today’s values –and say even if we look conservatively and say in 5 years time the property is worth £120,000 – and you bought for the equivalent of a net £80,000 – your £6000 in is now worth £46,000 assuming is cost neutral over the 5 years and with rental coverage of 175% you should be positive.

That is a massive return of 667%! You’ll never get a pension or bank close to this. The great thing with high yields is even if the market has not moved as quickly as you would like, ir for instance like now with the lack of credit, you are under no pressure to sell as it is working as a self funding investment.

So as many of our investors are realising the next 6 months could be the most exciting 6 months in the UK property market for a long time. This is simply a great time to build up some wealth quickly and help to secure your financial future.

We continue to see many Overseas countries and economies less affected by the credit issues.with LTVs of 90% still available in Czech Republic and Poland – and I like many investors will be continuing to buy in some of these economies which are still growing well.

So hopefully you are one of the many investors licking their lips at the bargains to be had now, and realise the window of opportunity is reducing all the time! I think the next 6 months will be the best opportunity and market sentiment will change quicker than you think!
Alan Forsyth runs the two websites at Property Investment Tips and Property Investment Deals. His company is one of the largest sourcing companies in the UK, and he is considered an expert on UK and Overseas property markets. He writes for several property magazines and gives free consultations to investors.
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