13th October 2018
There are serious concerns about where the property prices will go in the coming years. House prices in London have fallen for the fifth quarter in a row, this is as a consequence of a combination of high prices, stamp duty increases, and the uncertainty surrounding Brexit. Despite this, London is far more expensive than the rest of the UK, at about £500K; more than twice the national average.
There are dire predictions of further drops expected, of between 25-30%.
Therefore, why should someone purchase in this environment?
If this is what is being put out in the main stream media, this is a good thing from an investment angle. It acts like a firewall, which prevents the retail investors from entering the market. As a consequence of this influx, Auction Houses which were traditionally the domain of property dealers have become infested with end user buyers. Consequently, rather than auctions becoming a place to pick up deals, they have become a dumping ground for problematic properties for unsuspecting novice buyers.
You may question the wisdom of purchasing given the market will fall further. However, with the masses being kept away, there are very few real buyers left in the market. And there are those amongst the sellers who absolutely have to sell, regardless of the market.
There are two types of deals one should consider in this market. One is where the exit is immediate and you’re buying well below the current market price. In order to ascertain what the current market price is, you will often need to rely upon the trustable advice of a local agent – perhaps this is a contradiction or certainly a rare combination.
The other is to negate the expectation of capital growth completely. What I mean by this is to focus exclusively on yield alone.
Yields have dropped in London, as a consequence of sharp rising prices. A 4% – 5% yield in London now is a rarity.
The way to achieve this is to aim for largish properties, which can be converted to HMOs. In many boroughs there is no requirement for planning, the HMO status can be achieved through a licence.
This could boost your yield closer to 10%. This means you actually have a cash flow from your investment.
Irrespective of where the market goes, this cash flow is almost guaranteed every month. In fact, when the market is unstable, the number of renters increase and thereby boost the demand, thereby potentially increasing the amount achievable.
We are currently looking at a derelict building in North West London. The property looks like it needs a complete refurb internally. It’s so bad that they are not allowing any viewings inside. This is a good sign, as again it will keep most people away. From the square footage, it appears we can achieve nine rooms in this building; giving a conservative expected yield of 8%.
Of course, the main bulk of money made in property is through capital growth. So, whilst going for the yield one must still be mindful of the location.
Suresh Vagjiani
