Summer Market Update
I haven’t updated my
thoughts on the various property markets for some time. However,
things are changing yet again. Let’s 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. It’s 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 people’s 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. That’s 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 I’ll take a peak at the American property market.
john