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The pessimism in the UK press on the economy over the past few months has been relentless and makes for depressing reading for the average Briton over his morning bowl of cornflakes. It is now beyond doubt that the UK economy is in recession: growth has ground to a halt and unemployment is rising but for the experienced property investor things are starting to get interesting again.
The Bank of England base rate is at a historic low of 1%, property prices are falling while rental yields are rising (it’s easy to forget that investors have complained for years that the opposite has been true). This recession started as a crisis of confidence as lenders questioned each others financial positions and refused to lend to each other which in turn led to a crisis of liquidity. Fears then became reality as perfectly viable businesses have gone into administration as banks withdrew funding and so a “phoney war” has become reality.
What is characterising the UK economy at the moment is its unpredictability. It was only a few months ago that the spectre of stagflation (stagnant growth and rising inflation) was all over the papers but now everyone seems to be talking about deflation as consumer demand dries up and the price of energy has plummeted.
As ever the press veers from one extreme to another but just as property wasn’t an investment that would keep rising in value for ever in the boom years, so it isn’t an asset that will keep falling in value forever now. Property investment has not suddenly become a bad idea, you just need a strategy that capitalises on the changes within the market. Equally you can’t tell the average Briton that owning his own home is not a good idea: it is inbuilt into the national psyche. People will always need a roof over their heads either to buy or to rent.
The huge rise in repossessions in the UK represents a significant opportunity and distressed property in general is where the market is now. According to the Council of Mortgage Lenders the number of properties repossessed in the first half of 2008 was up 48% on the same period the previous year: the figures are expected to rise to over 70% by the end of the year. Thousands of home owners, investors, developers and banks are in financial difficulties and are desperate to sell all sorts of different properties. Most want cash as quickly as possible and are often willing to accept huge discounts. Banks, of course, are particularly desperate for cash as they try to rebuild their balance sheets, but this situation won’t last indefinitely. The banks are already under significant pressure from the government to increase lending and liquidity is likely to ease further as interest rates fall. Investors should capitalise on this window of opportunity.
According to the head of auctions at King Sturge, Felix Rigg, now may be the time to capitalise on the market pessimism:
“To me, the time to buy a property investment is right now- while prices are still falling and the market is at its softest-rather than later, when the search for a bargain is made more urgent by the sense that recovery may be just around the corner”
It is now eminently possible to buy distressed property for 50-60% below what is sold for only a year or two ago and to achieve 10% or more in rental yield but significant research is needed. A large converted two bedroom flat in the popular Sefton Park area of Liverpool which had been repossessed recently sold to an investor for £85,000. The same property sold for over £300,000 in 2005 and will now rent for at least £750 a month, a yield of over 10%.
Another recent example is a three bedroom converted apartment in Thornton Heath, greater London, which sold on the 26th January for £112,000- the same property sold for nearly £200,000 in 2004 and will rent out for £850 a month- a yield of over 9%. Opportunities are everywhere and, provided correct research is done, an investor can effectively buy themselves a good level of income.
Finance remains a hurdle to overcome, particularly if it is being sourced in the UK where it is virtually impossible to secure more than a 75% loan-to-value mortgage for a UK Buy-to-Let property. There are also set up fees of around £2000 and significant redemption penalties while interest rates tend to vary between 5 and 7% (which, in historical terms is still very low). As finance starts to ease later in the year competition for these properties will start to increase and so the current limitations are actually a good thing for an investor wanting to capitalise on current low market confidence.
The strength of the Euro presents a fantastic opportunity for the Irish investor (1.13 Euros to the Pound as this goes to press). This effectively gives the Irish investor a further discount of 20% or more as most commentators agree that the Euro is significantly overvalued at the moment and is likely to weaken in the New Year as more bad news leaks out of Europe.
There is no doubt that 2009 is a year of significant opportunity for investors looking to buy in the UK. You will need some cash but it’s very possible to buy a good quality property which will cover not only all of its costs but will also pay you a decent income if you conduct proper due diligence. It is not the market to try and make a quick buck but re-finance is possible after six months and longer term profits are certain provided care is exercised. The pessimism of the press, the weakness of the pound, and the desperation of the banks are all enormously positive for the opportunistic investor. |
