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London – a multi-dimensional story

19th March 2016

Properties around the £500k mark are still flying off the shelf, as demonstrated by auction lots. One flat in Fulham which we valued at the top end at £420k went for £490k only last month.

Savills had brought its auction which was due on March the 28th forward by a whole month in order to incentivise buyers to purchase before the stamp duty rise. The auction achieved a sales rate of 81%. Its sales rates previously have been 85% and prior to this even up to 91%. Therefore, did bringing the auction forward have any impact what so ever? Maybe not.

In reality I don’t feel the stamp duty rise will have a huge impact especially at the lower levels. Lower level now means above the level of £500k to £1m, as in over half of the boroughs in London the average property price is now around £500,000.

The London market may dampen temporarily, just whilst everyone absorbs the rise. I believe it will not have the impact that many are anticipating which is a long term slowing down of transaction volumes, and reductions in price.

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The market is more robust than this, it has absorbed two stamp duty blows already and is still standing strong.

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Of course the world economics has shifted and there are decisions which hang in limbo which may impact the property market, depending on which way they land.

But the truth of the matter is where will people put their money if not in property? The demand for London property is wide and comes from many diverse segments.

In 2009 onwards, investors were purchasing ex council properties in central locations, and renting them out to the DSS. The rates of return were extraordinary. To give an example, we sourced a three bedroom property in Westbourne Park Road, London, W2 in November 2009, for a price of £312,500. The rent achieved on this property after completion was £720pw. This gave an annual rental of £37,440 and a yield of 12%. To put this further into perspective, you would have only needed £46,875 for the 15% deposit to purchase this property. Your mortgage costs would have been around £13,281 (typical mortgage) and after all costs your net income would have been around be £20,415 which sounds crazy, as it means you would have received a 43% net return on your money. Crazy but true – we were doing this for our clients.

This property I remember specifically, as one client came all the way from Sussex over a weekend to look at this property from the outside. He came and went and then told me on Monday morning the property was ugly.  I told him that he wasn’t going to be living there therefore the looks are unimportant, what he should be looking at is purely the numbers. He wasn’t convinced, though he did go on to buy a prettier property from us at a later date.

It was a no brainer to do this deal, yet the take up wasn’t as aggressive as one would think. There were the Doubting Thomas’s who sat on the fence and then there were those who were doing it on the ground, they were doing these deals. This segment in the market was mushrooming. Mushrooming is actually the correct word, as this sector was growing in the dark, there was little publicity about the yield being obtained in Westminster.  Those who did one deal, wanted more of the same, they told their friends they were actually getting this rent in reality.

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There was talk this was a honeymoon period, and not a viable long term investment and the government was likely to put a cap on this, this would bring this whole segment of this housing sector crashing down. These ex-council properties were bought on the basis of an over inflated and temporary yield. The demand was coming from only one sector and that was the courtesy of the government, who were going on a mission to enforce cuts.

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I heard this talk, and it still didn’t make much sense, ok the rental yield was temporary, but even if it lasted for one year you got almost half your deposit back. After all the overriding factor of property investment is location.

This is the governing and overriding factor in a property investment – not the yield, and these properties were in key locations, as the inflated rents were given only for housing in top London Boroughs.

The yields came down a few years later, when the government enforced their cuts, but the property values didn’t – they kept rising and rising. The point being the demand is so strong and multi segmented, if one segment drops away others will quickly fill the gap.

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Now ex-council properties are almost on par with private properties in terms of price. In many ways they make better BTL investments. The current value of this property according to Zoopla, is £550,000 which is a rise of 176% in six and a half years.

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The above experience demonstrates the multidimensional demand of the London market. Many people cite the lack of Chinese money to be a concern from the demand side. This may affect the new build sector, but there is a renewed interest from the Iranians, I’m hearing this from the ground. There are calls coming in to some of the Middle Eastern colleagues I have; they want to spend.

I suspect for properties around the £500k mark there will be no notable decline in demand. The supply at this level is limited and there is always a herd chasing these properties. A £15k increase in stamp duty won’t enter most savvy investors’ minds when purchasing a property. On a long term basis of five years plus it makes little difference in the investment.

The Real Deal

This week’s Real Deal is not exactly a deal …

It’s an invitation only seminar.

It will take place on Wednesday 23rd March, in Central London, where we will reveal details of our most lucrative investment to date.

You will be able to meet and interact with the experts, who have studied this opportunity in depth in person.

Call the office to register your interest.

!Tips of the Week

Don’t just walk into your bank and ask for a mortgage, you will just get a product but not the most suitable one. If you are looking for advice consider using a specialist mortgage broker. Remember interest rates are not the only point to consider, arrangement fees and exit fees are equally important.

Control your emotions. When it comes to an investment property don’t think how your family will fit into the rooms a few years down the road, keep the two separate.

 

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