Wednesday, 22 May 2013

People Power

I am a firm believer that property is all about people and places. Aside from the macroeconomic factors that affect the housing market, micro factors such as location specifics and demographics also affect prices considerably. An area's desirability is often driven by the movement of people and changing lifestyle trends, which in turn will drive price movements.

As Londoners are being priced out of certain areas of the Capital as their property needs change, many are moving to unfamiliar areas. This is nothing new, but the interesting change is that whilst 20 years ago many Londoners would opt to move to commuter towns around the M25, today's London professionals wants to remain firmly within the city limits.

It's not just affordability that has swayed decisions in the past, often a need to accommodate a growing family, access to better schooling or the desire for more open space has driven decisions to move past the M25 and embark on making new 'train buddies'.

However, London has evolved in the past 20 years and many now actively see the benefits in developing their roots in the city. Improving transport infrastructure, more schools, increasing preservation of green areas and developing housing stock are all tangible reasons for people opting to stay in he Capital. Intangibly, the desire for a better work/life balance, increasing flexibility in working hours and a wider awareness of the green agenda are meaning many professionals are seeking a shorter commute to work.

So, you need a bigger home, preferably a house, you'd like a garden (or at least some outside space) and you want a shorter commute so you can spend more time seeing the family grow up. Where do you look?

Areas such as Dulwich, Camberwell, Herne Hill, Lee, Deptford, Hackney, Dalston, and Stoke Newington are starting to increase in popularity with young families as they provide quick access to central London and have a good stock of family houses in the area. These areas are also developing as social destinations, with boutiques and eateries becoming commonplace, complimented by access to green space. What the above areas all have in common is that they all have no tube stations, but central London can be accessed in less than 30 minutes by overground train, bus or bike. All these areas also trade at a discount to counterparts with tube connectivity.

It may be obvious by now, but you will have to make compromises and be a little bit brave, however over time you could be making a very wise economic decision. Needless to say, there are other pockets around London where one could look, but these are more prevalent due to south east London's lack of underground infrastructure.

It's not just families looking for value that should consider these points. Investors looking to speculate over the longer term or enhance their return through a mixture of income and capital growth, should see these as attractive investment reasoning.

On another note, preparations for our Australian business are gaining momentum and we are looking forward to opening later this year. Writing this from a rather fresh feeling London, I think that some development trips down under will be in order sooner rather than later!

Wednesday, 8 May 2013

Managing your investment - the gross to net effect.

With property investment, people always talk about yield, but what exactly is this? Detailed valuation models will often analyse an initial yield, reversionary yield, equivalent yield or equated yield among others. To most outside of the property industry this will look a bit like double-Dutch and their individual relevance can be subjective. 

Most investors in residential property talk about income yield, which crudely is annual rent divided by price. I say crudely, because often this calculation can be misleading and actually hide a poor performing asset. If you are looking at income yield on a residential property investment, you want the net figure and not the gross. The net figure is derived by subtracting your costs for that specific property (e.g. management, repairs, taxes). Some analysts will argue that you shouldn't include financing (mortgage repayments) but doing so will give you a real idea of performance. 

Not including finance costs, it has been said the average gross to net for residential property investments is 65%. So, based on a gross yield of 5%, your net yield including finance costs will be 3.25%. Now, take into account financing and your returns are further eroded, in some cases income may not cover costs. 

Why would any investor run a negative cash flow? In some countries there can be tax benefits for doing so, but more often than not it is because the investor believes that the price of the property will increase at such a rate whereby the gains from a sale at a point in the future would be significant enough to mitigate a negative cash flow over a period of time. 

This is highly speculative many would argue, and it goes without saying this would only work in a rising market. Essentially, total return of an investment is a combination of income return and capital return (price movements). 

What about if you're a long term investor and not looking to sell anytime in the future?  This is where managing your gross to net becomes important. 

If you have a property manager, make sure they are providing you with value. Property management fees can range from 5% to 20% of the rent received, which can be significant sums of money, so make sure they justify that fee. When undertaking works, sometimes the cheapest option is not necessarily the best and could mean you incur future costs due to poor quality materials or workmanship. Boilers are a good example, cheaper boilers have a shorter shelf life than the more expensive equivalent, therefore over a 5 year period you may spend more on repairs than if you'd gone for the dearer option. 

It's also important to know your competition. Landlords should make sure their property is the best of the competition so void periods are minimised. This is where many investors lose money because they don't spend the time or money on differentiating the quality of their product. Again, know your demand and beware that you don't go overboard, a pig in lipstick is still a pig. 

If you're thinking of investing, often it doesn't hurt to take some advice. Having a plan and knowing your market will prevent nasty surprises but will also ensure you can take advantage of any future opportunities that may present themselves. 

On an unrelated note, look out for our article in this month's editions of the 'Your Media London' luxury lifestyle magazines and our ad in 'The Resident' and 'Mayfair Resident' distributed across London. 

Wednesday, 1 May 2013

Behold the leasehold.

London's ever increasing population and finite supply of development land has meant that the city is one of the most densely populated cities in the developed world. As such property has always had to adapt, as in any highly populated urban area. 

The sight of apartment developments are often a sign you are entering the bustling city. The creation of apartment buildings has allowed multiple residences to occupy the same plot for decades, thus going some way to solving housing issues that affect major cities. 

However many are not aware of the differences in buying an apartment versus purchasing a house. Many see the apartment marketed as leasehold, but this doesn't often sound the alarm bells that it should. 

Ultimately in the UK, the Crown (The Queen) owns all the land. Therefore the closest thing to real ownership for us mere mortals is a freehold, which is the ownership of 'real property'. Freehold is the common title for property ownership in the UK. Essentially the estate must be immobile and ownership must be for an 'indeterminate duration' i.e. no fixed end date. For those purchasing land or a house on the plot of land it is more than likely you will purchasing freehold. 

What about if you're buying an apartment on the 5th floor of a new development, or a flat within a converted period mansion building? Well it's likely you will be purchasing a leasehold title. But what does this mean? It means that your ownership has a fixed end date, at which point your possession will revert to the freeholder, and also you will be bound by the terms of the lease agreement. 

So why should you be aware? Leaseholds are essentially diminishing assets, so as time goes on and the lease term gets shorter, it is worth less. You might own an apartment in a block of identical units. The apartment next to you has a lease term of 125 years and just sold for £500k. Your apartment though, has a lease term of 50 years, is it worth £500k too? Unlikely.

What about the lease terms? As with any legal document, reading and understanding the terms is imperative. Key things to look for are ground rent, service charge processes, restrictive terms with regard to refurbishments, restrictive use terms and hidden costs amongst others. 

A recent example we have seen is a ground floor apartment in a converted  period house purchased on a leasehold title, whereby the purchasers wanted to extend the property to add value. Once they had purchased the property, they found that a restrictive clause in their lease did not allow them to do this and as such they have not been able to execute their plan. If they had read and understood the lease agreement, it may have been that they would have altered their pricing or chosen another property altogether. 

In London it is near enough impossible to avoid purchasing leasehold unless you have several million pounds at your disposal, so the key is to get as much information as possible and make it relevant to you. Those buying in new developments will often be purchasing a 125 year lease or in some cases a 999 year lease, so you won't be worrying about a renewal for a while.  

Other forms of title include share of freehold and commonhold, but as with anything the devil is in the detail, so have an expert on your side when assessing the documents. Make sure you are comfortable with the ground rent costs and service charge fees, and beware these are can be lumpy. 

On an unrelated note, London has been a wonderful place to be in the last few weeks as we've been graced with intermittent days of glorious sunshine. You can tell it everybody is worried it won't last as every outdoor dining table, park bench or patch of sun drenched grass is filled by about midday, even on a Monday.