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Analysis of the property markets. Buying real estate in the UK

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Summer Market Update

I havenít updated my thoughts on the various property markets for some time. However, things are changing yet again. Letís start with the UK.

The characteristic I noticed a couple of years ago seems to have turned into a trend. I refer to the entry into the market of consortia buying up large buildings and turning them into bedsits and buy-to-lets, and then selling on the units to investors who are looking for regular income.

I pointed out that I thought this was the beginning of a new phase in the property market. It started as a reaction to the pathetically low rate of return on cash investments. Put your money in the bank and see inflation just waste it away. That was followed by it wasting away through lack of a decent return. Most people were getting just one or two per cent returns on their cash deposits.

Along comes a company advertising 7% returns on a student buy-to-let, and you have a viable alternative. The money is backed by a solid security, and the returns are way better than keeping cash at the bank. If you are lucky, you can secure 10% or even 12% returns on a buy-to-let, but I suggested that when the market settled, the average returns would probably hover in the 6%-8% range.

The interesting corollary to this was, I thought at the time, that this would bring a sense of reality to property prices, as the more the managed buy-to-let market grew, the more house prices would tend to stay closer to a mean, and that mean would be attached to the return on capital.

My theory was that if you can buy a property for £100,000 and rent it out for 8%, then that gives you a basis for an intrinsic valuation of the property. If a similar property down the road then sells for £150,000, that makes buying so much more expensive than renting so that only a fool would buy, and prices would tend to revert to their real value. Whether this happens or not remains to be seen, but at the moment there does seem to be a balance emerging in the market.

What will tend to keep the market in balance is the ratio of investors seeking a return versus the availability of property. If returns drop much below 6%, then investors will start to look elsewhere for good returns. That means house prices will have to drop until the ROI gets back to an acceptable level.

I will develop this idea in my next re-write of my Property Investors Bible. Itís time I updated it to take account of the low interest rate/low inflation environment.

So, what is happening out there?

There are companies the length of the land offering managed buy-to-let deals. The market is thriving, and returns are running anywhere from 7% to 10%.

By comparison, property prices for home owners are dropping back. There have been statistics to show how much house prices have risen recently, but, by and large, the anecdotal evidence has been that the opposite has happened, and prices have been, and still are, dropping. My own experience mirrors that. I think house price rises have been restricted to a few hot spots, and the rises have been erratic to say the least. I expect slow but small increases going forward as the economic outlook improves, however, prices generally are out of so many peopleís reach that any rises will be small and localized.

In conclusion, I am looking forward to a more stable UK housing market in the years to come.

Take a deep breath. Will my prediction get blown out of the water? Who knows? However, I am putting my money where my mouth is. I am going to buy into a small property investment in the UK. Thatís my first venture back into the market for more than a decade.

Please note, I am looking for income, not capital appreciation. I have settled for a straight 10% return on a fully managed portfolio.

If anyone is inclined to follow me and start buying, please note the following:

Check comparative purchase prices. Check comparative rents. Run a check on any management company, and closely read any lease. And remember, the whole point of this article is to emphasize the need for sale prices to be intrinsically based. The smaller the return, the more expensive the property is. The best scenario is to buy low. This is one area where a higher return, if it is genuine, will indicate better underlying value. Generally speaking, the lower the return, the more the development company is egging the sale price.

Next week Iíll take a peak at the American property market.


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