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Property Investment – What Now?

November 2016

Following the Brexit result and various government interventions, people have been questioning whether property investment is still worthwhile.

Government Intervention
Intervention from the UK government in the property market ranges from the new 3% stamp duty (SDLT) surcharge on additional properties, tougher buy-to-let mortgage criteria with stress testing on an interest rate up to a hypothetical 5.5%, plus from next year the rules for landlords to offset all their mortgage interest against their tax bill will be phased out. In addition, a change in Capital Gains Tax (CGT) means there is now an effective 8% increase on any uplift regarding the sale of residential property.

Why Intervene?
This I think falls down to several areas, including their wish to put off property investors who they feel have a competitive advantage over first time buyers. The government wishes to create stability and ensure that, if the economy got tough, the UK was insulated from the storm and the banks were covered yet again.

The government’s overall aim is, in theory, to help more people on to the first rungs of the property ladder. Their thinking is that if they increase the upfront costs, it will have the effect of easing demand.

The Result
It has been somewhat mixed. Yes, it has slowed the rate of some buy-to-let investors. However, overall it has actually put more competition in place for first time buyers. Wealthy investors are now looking at cheaper properties and splitting their funds, rather than going for the one high-value property. The government has also inadvertently choked-up the supply of rental properties. With tenant demand remaining high, we have already seen that monthly rents have increased. This has been down to landlords passing on the front-end costs from the government back to the tenant.

The question therefore remains that, if you are a tenant, how are you meant to then buy a property?

I argue that we are left with the same issue of people trying to get on to the property ladder, despite the government changing the property investment playing field.

How to Look at Property Investment Now?
When looking to invest in property, you must always look at the medium to long term – there is no such thing as short-term flipping any more.

They key is to look at the overall transaction. Do bear in mind that the 3% SDLT payment is a one-off. If you compare this with the Borough of Newham in East London, this saw a 22% capital increase last year alone. This may provide more perspective.

You also need to consider your yield vs capital increase. For example, Leeds is a low capital outlay and is much more affordable. There are high yields of between 10% to 30%. However you will only see a modest annual capital uplift. Overall it is deemed to be fairly low risk.

Turning the tables and looking towards London,this has a high capital outlay and a much lower yield of a few percent. However, depending on where you buy, you can really see a significant capital uplift (as per Newham), although this comes with an increase in risk.

AirBnB has seen a surge in recent years and is worth bearing in mind. You are currently able to offset maintenance and tax deductible costs against your end of year tax bill, because you are renting out the room and not the entire flat, plus there is the £1,000 per year digital tax break.

When to Invest?
The time is now! The market overall, especially in London, has come back with the latter coming down by 8% to 9%. Interest rates have never been so low (and cannot get much lower). As a result, borrowing money has never been so cheap. The Brexit decision has been made, the economy is looking good and demand for rentals remains strong.

Many people ask, “What happens if the market falls in the next couple of years?” As I have mentioned previously, you are looking at the medium to long term. One or two years overall will not have a significant impact.

Where to Invest?
The key points to consider for property investment now are:

a) Look towards key northern cities, such as Leeds, Manchester, Liverpool and Sheffield, plus student accommodation. These have relatively low capital outlays, but can provide excellent yields.

b) When looking at London, compare Crossrail stations, zones 3-6, plus east and south-east boroughs. The higher risk areas include Peckham, Dagenham and Forest Hill, which are predicted to see strong capital uplift in three to five years’ time.

c) Key university cities, such as Durham, Bristol, Reading, York, Cambridge and Warwick, remain popular with investors too.

d) What does not change is that the UK is still seen as one of the safest places in the world to invest. Property is still proven to historically outperform any other investment over the medium to long term.

e) Overall, always know the type of tenant who you are aiming for. As a generalisation, consideration should be given to buy a property with two bedrooms and two bathrooms. This gives flexibility when renting, especially through Airbnb, and if you decided to sell it will appeal to a wider audience.

f) Ideally secure some parking for the property. If you do not use it, you can rent it out separately and it will provide another passive income stream.

g) On some new-build properties, the advantage is that it is brand new and little can go wrong. However, they may be poorer quality, especially behind the scenes. Do bear in mind that a developer will usually require a minimum of a 25% profit margin on each unit and questions therefore need to be asked on where and how they are making this margin.

How to Invest?

When it comes to investing, the key is to be seen as the ‘preferred purchaser’. This is the individual who is seen by the agent and vendor as the most reliable and secure, not necessarily the one with the highest offer…

a) Ensure your cash funds are liquid and, if you are looking for a mortgage, ensure that you have an ‘agreement in principle’ (AIP) already approved.

b) Instruct your conveyancing solicitor early on and ask that they open a file and client ID is approved – never cut a corner when it comes to conveyancing, as it is you that needs to live with the consequences!

c) Overall, ensure that you have a good personal rapport with the agent and vendor – it is a people business at the end of the day.

In conclusion, the government has been on a PR exercise when it comes to their intervention in the property market. Despite the advice of those in the industry, the UK government has intervened in the wrong areas and have made the situation worse for first time buyers.

On the flip side, if you are looking to invest in property, now really has never a better time. Borrowing and interest rates have never been so low, tenant demand remains high and if you are buying in the right area, you only stand to gain over the medium to long term.

This article was also featured during PwC’s #5daysofmortar (link).

If you wish to discuss your requirements in more detail, please feel free to drop me a line at alex@alexgoldstein.co.uk or 01423 788377.