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Accumulate, don’t speculate

2nd January 2019

We are now in 2019, and there is no further certainty in regard to Brexit.  This has led to uncertainty in regard to the UK property market.  This is typified by a recent large deal which fell out of bed, leading to a massive 1/3 drop in share price in just one day.

A £2.9bn buyout of the shopping centre landlord Intu collapsed after concerns regarding Brexit spooked a consortium of buyers.

The announcement that talks had ended prompted Intu Properties’ shares to shed more than a third of their value, plunging 36% by lunchtime trading to 124p — their biggest one-day fall since listing 26 years ago.

The Bank of England has warned that if the UK leaves the EU without a deal in place, prices of commercial property assets such as shopping centres, offices and hotels could fall by as much as 48%, a greater drop than during the financial crisis.  A less severe “disruptive” Brexit scenario would still result in a 27% fall, the central bank said, adding to a series of warnings about the potential economic impact of the UK’s departure.

So, how should an investor respond to such a nervous market, and one which doesn’t look likely to improve in the short term at least.

Should we sit on the fence?  Or is this the time to dive in and exploit the situation?

The problem with headlines is that everyone likes a simple one.  It means you have to think and discriminate less.

It’s clear how the masses are responding, they are sitting on the fence; a wait and see approach.

Do you make money by following the masses?  The answer is a clear no.

With future potential drops the larger you buy the more the risk of a drop.  This, however, does not mean the top end of the market has dropped off a cliff’s edge, this is not what agents are reporting.  Rather, buyers are using this back drop to be more choosier in regards to what they purchase.  The best properties are selling in excess of their guide prices.

There are segments within the market, in terms of prices, yields and geography.  The whole market cannot be painted with one brush.

Now is precisely the time to enter the market, when there is great uncertainty.  Not stupidly, but with great discrimination.

We have identified areas in London where the yields are circa 4.5% to 5%.  In one location we are targeting we expect the potential for future growth will be steady, strong and sustained for the next five years at least, similar to what Walthamstow started to experience in 2007.  However, the growth factors in this location are even stronger in terms of connectivity, and the property prices are at entry level, within the realm of affordability for first time buyers looking for shelter.

This growth potential is compounded by the comfort of a strong yield.

The other focus in 2019 should be yields.  Investment where the rental yields can be enhanced, such as HMO properties.  Ones which will provide income on a monthly basis, whatever the weather.  Yields of even 8-10% are possible on the funds invested.  These kind of yields immunise you from the performance of the underlying asset – not that this should be ignored.

Both the above scenarios are not pie in the sky, they are achievable.  We are doing deals on the ground, along the tracks of what has been described in this article.  How will you respond to the market in 2019?  Will you sit on the fence? Or will you exploit this unique situation?

Suresh Vagjiani

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