Colour Investments Property Investment

The credit crunch has ushered in a new era of property investment. As little as 18 months ago, any sort of investor could take advantage of property deals such as ‘no-money in’ or buying to ‘flip’. These investment strategies took advantage of the fact that UK property had good short-term growth and credit was cheap.

However, in the current investment environment credit has dried up. Although we are on a decreasing interest rate trend, lenders are not so keen to pass on cheaper finance to borrowers – partly because they are keen to make up for the losses that many of them made as a result of the credit crunch.

Does this mean that it is a bad time to invest in the UK? On the contrary, it would seem that we are in a buyer’s market at the moment: it would appear that we are experiencing more supply than demand at the moment, putting the power into buyer’s hands. Buyers are in a position to negotiate the best terms for themselves, whereas 18 months ago, sellers were in a position where they could wait for a buyer to match or exceed their asking price.

Property investors could take advantage of our current environment by exploring the possibilities of purchasing off-plan. Off-plan has the advantage that you are buying at a discount from today’s prices, but, you are buying into tomorrow’s market (i.e. the market of when the property completes).

Looking back to the infamous house price crash of the early 1990s and the economic fundamentals: at the time interest rates were around 15%; inflation was around 10% and unemployment was approximately 4 million people. If we look at the situation today, interest rates are currently 5%, inflation is around 3% and unemployment is near record lows at approximately 1 million people.

It is interesting to see that house prices after the 1990s crash were higher than house prices before the crash. This shows us the value of looking at the long term. The important thing to note is that by taking a long term view, investors are mitigating themselves from short-term fluctuations in the market (such as the credit crunch). Combine this with the fact that it is a buyer’s market at the moment, it would seem that now is the ideal time for an investor to add to their property investment portfolio.

There has been a definitive change in the buy-to-let market conditions. This is due to the tapering of lending products caused by the turbulence of high-risk lending over the last five years. However, it is not a time to necessarily worry about property investment. In fact, if you are a scrupulous landlord and have balanced your portfolio correctly, this is exactly where an experienced investor has the opportunity to take advantage of a tumultuous market. Effectively there are two main concerns to consider firstly what considerations to take on board regarding your present portfolio and secondly how to add to that portfolio:

1) What to do with your present portfolio of properties (if you have any)
It is 100% a buyer’s market out there at the moment. On that basis it’s not a great time to sell and undoubtedly, bar a few isolated city centre areas, it is advisable to hold on to your property. As a long term appreciating asset property will always go up and as long as your properties are balancing in terms of mortgage payments vs. rental income it is the best idea do keep hold of them. However, if you are in a situation where it is necessary to re-mortgage and you really cannot find a rate to keep your books balanced it may be time to consider cutting certain losses and cashing in on investment in order to facilitate other acquisitions.

2) How to expand your property portfolio
Simply, ‘cash is king.’ The market is extremely edgy and many vendors that have been on the market for a while or new build developers are offering extremely good discounts. For instance take our BBC site which is due for official release by estate agents on the 24th April, 2008. We have a 8% pre-release discount which in a different market would be unheard of. On this basis if you are buying you have the leverage to buy with a good solid discount from market value.

Paragon Mortgages (who specialize in Buy-to-let mortgages) have quoted a 2.4% rise in rental income over the month of February. With lots of 1st time buyers renting instead, the demand is now outweighing the supply for properties and therefore rents are on the way up. Therefore hold onto your present portfolio and buy only reputable city centre areas that will rent easily and cover your repayments. This strategy will give the landlord the reigns in what some people may consider to be a unstable market .

In very simple terms we are very positive about the long term prospects of buying in the UK for investment purposes. The key is “strategy” and making sure you can ride out any slowdown in growth in the UK and still rent your property out meaning you can leave your asset to sit there and make you money over the next 10 years. We are currently in a “buyers market” in the UK and as buyers we are seeing some fantastic deals coming to the table from developers which we are now able to offer you.

Here are some of the main factors to look at when considering UK property as a long term investment at the moment, I have listed some positives and some negatives to give as informed view as possible so you can make your own minds up:

Positives:
• Supply vs Demand imbalance (50,000-80,000 homes shortfall per year and the situation is worsening)
• Increasing population & increasing number of immigrants from new EU nations
• Reducing unemployment & Increasing employment
• Shortage of building – reduced building in 2008 exemplified by the difficulty for developers to raise finance
• Land shortage especially in city center locations, most noticeable in London
• Planning back-log, time taken and costs for planning consent
• GDP remains a healthy 2% (3+% in London)
• Interest rates coming down - I predict another .25% drop by May time due to remarkable low inflation.
• Aspirations for owning a home coupled with massive overseas investment from the likes of UAE, Dubai, Russia e.t.c.
• HIPs (Home Information Packs) discourage people from moving causing supply shortage
• High stamp duty discourages people from moving causing supply shortage
• Lots of people buying a second home to live in and letting out their old home, causing further supply shortages
• Buy to let investors show no signs of slowing up and in fact are buying now more than ever in this buyers market
• Revised 18% capital gains tax down from 40% improves the incentive to purchase property for investors
• Rents rising by 10% per annum – rental property market remains firm so buy to let investors are enjoying low risk investments

Negatives:
• Price to earnings high at ca. 10 (long term average 6)
• Inflation remains an unknown quantity as interest rates could rise in the long term if oil prices increase dramatically
• Credit crunch reduces borrowing for people with poor credit rating effectively making the rich even richer
• Average wage earner finds it hard to borrow enough to buy a house
• Increase difficulty in getting mortgages and banks holding higher rates because of credit crunch

Most of the above bullet points that I have mentioned are some of the reasons why we don’t expect a “property crash”. A slow down in growth is certainly on the cards and apparent in some areas already in the UK, but as we are buyers acting for our investors we actually see this as an opportunity to get some great bargains this year as every other less sophisticated investors panic over what they read in the papers. There are no headlines like “Long term property investment is stable” that are going to sell newspapers, whereas “Property Crash” will sell millions of papers. So we also feel the frustrations that Gordon Brown has with the current media situation and feel they are partly to blame for the current market sentiment by all of the un-balanced headlines they keep printing. And as we all know people (sadly) believe things that they read.

The credit crunch will certainly make it harder for “sub prime”/less creditworthy buyers to enter the market as the mortgage companies are tightening up their criteria for lending. I think this is a good thing and could have come sooner as the banks have been lending to anyone and everyone. Going forward I think the mortgage products will start coming back to the market more and more this year albeit more cautiously and the long term effects on property will be minimal when we look back in 10 years time.

Concluding comments:

All of that being said we need to be diligent when investing at the moment by considering the best mortgage product and gearing situation as well as buying smart and BMV (Below Market Value) to gain an extra buffer to the market. We are looking forward to the remainder of 2008 and the types of deal we will be able to offer you as well as other excellent property investment opportunities overseas to give you some fantastic diversification to your property investment portfolios.

Nick Wallwork
- MD Colour Group

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