|
|
|  |
UK Property Market Assessment
International Property Solutions
26 July 2006
Investing in London: missed the boat or is now the right time?
This is a summary of a talk given at the Rode Convention ( www.rode.co.za) by Scott Picken, MD of IPS.
If you are interested in UK Property Investment, please click here.
The UK property market is characterised by hype, with the British Press either saying it is absolutely booming or that the bubble is going to burst (whatever sells newspapers!). At IPS we believe that it is far more important to understand the property fundamentals and then make decisions based on financial analysis – minimising risk and maximising return.
The average property price in the UK is £184 924, which has seen a growth of 5.43% in the last 12 months. The average price has nearly doubled in the last 6 years and the average growth for the last 30 years has been 9% year-on-year. Another major (fairly recent) trend is the buy-to-let market. Banks began offering buy-to-let mortgages in 1999 when the industry was worth £5 billion; it is now worth £50 billion, only 6 years later.
With this growth many of the bear pundits believe the market is due to crash. However, one needs to understand the fundamentals of the property market first. In the UK the two major influences on property are unemployment and interest rates. The economy is currently in a stable position and unemployment is at an all-time low. With regards to interest rates, for the last 30 years interest rates have averaged 9%, but over just the last 15 years the average has been around 6%.
Graph of Bank of England Interest Rates
The growth in the property market is simply based on the fundamental economic principle of supply (production) and demand (affordability).
In terms of affordability, based on HSBC statistics, people are currently using 28% of their salaries to pay their mortgages, compared with an average of 38% over the last 30 years and a high of 60% in the early 1990’s.
In terms of production, in order to address the shortage of housing supply in the UK, Chancellor Gordon Brown has promised:
- A 24% increase in government spending on housing
- 10,000 new properties in London by 2007
- 200,000 new properties in the Thames Gateway by 2016
It is important to understand that the population is expected to grow by 4.4 million by 2021, 50% of this growth through immigration. This means1.86 million additional homes will be required, or around 83 000 per year, based on current household of 2.36 people per household. The household size is also expected to drop from 2.36 to 2.28 in 2010, as household demographics evolve, due to an increase in the number of divorces, single homes, people moving out of their parents’ homes earlier, etc. This constitutes an additional 125 000 households per annum. In total this means the UK needs an additional 208 000 households per annum. However for the last 10 years the UK construction industry has only been able to deliver 170 000 households per annum. This will produce a 15% shortfall; every 7 years, they fall behind by an entire year. As this trend continues, in areas such as London where the transport systems are inadequate, people will want to live closer to their workplaces, which will continue to increase the prices.
The question we are always asked is: why London vs. the rest of the country?
The reason for this is two fold:
- Better capital growth than the rest of the country
- A stronger rental market – this will be explained further
Historic UK Capital Growth Rates
When investing in the UK we have 3 strategies.
- Off plan - Invest in one of the new developments, and wait for the property to go up in value. One needs to be very careful of rental guarantees as many companies sell these with a purchase, but when the rental guarantee comes to an end the client finds that the guarantees were not market related. At IPS we suggest you thoroughly scrutinize these deals - there are good rental guarantees and bad ones.
- Prime areas – a strategy many Arabic and Eastern Investors use is to buy property in prime areas. We believe however the yields are not very attractive and we get better growth and rental yields in secondary areas, like Wimbledon.
- Professional Sharers – at IPS we believe this is the most attractive market to invest in. There is very strong rental demand and the properties statistically have actually had better growth. Through understanding the rental market and being based in areas which are very popular, we can minimize the risks and ensure a very solid medium-to-long-term investment.
In terms of the rental market:
- British People
- 13% of people in London are in their 20’s
- The country’s average is 6.6%
- Wandsworth = 16% of the population between 25 & 29
- South Africans
- ¾ million living in London
- 1.3 million living in the UK
- 1 in every 11 Londoners is a South African
- Olympics – 2012
This graph below shows the number of British graduates that complete their studies around the country and then come to work in London. It is more than all the other cities put together:
Graph of where UK Graduates Take Their First Job
“I never have the faintest idea what the stock market is going to do in the next 6 months, or the next year, or two.”
--- Warren Buffet
At IPS we do not know what is going to happen in the next 6 months, 1 year or 2 years, but we believe that if you can find properties below market value, with positive rentals from day one, they should make for very solid investments in the long term.
We find our properties through the trade market and this ensures that the properties are below market value, and can be compared with existing properties, so we use market related rentals. We recently sold 16 units in Southfields which started from £165,000 and had net yields of 6 – 8% with 3 year rental guarantees in place with the town council. Basically clients would be pocketing between £200 and £500 per property per month – what more could you ask for in terms of a passive income investment?
UK Property Investment
If you are interested in investing in the UK property market, and would like IPS to contact you with investment opportunities, please complete the form below.
Keep abreast of the latest property market news. Subscribe to the IPS Newsletter:
Our preferred partners:
|  |
| |
|
| | UK: +44 (0)208 971 3245 |  | SA: +27 (0)11 880 5340 |
| | |
Invest in the most sophisticated property market globally. IPS has the total solution for investing. Want to know how? 
This concise and easy-to-read book covers just about everything (tax, costs, finance, legal entities, etc.) that you need to know about buying a property in S.A.
R 810,000