Over the past few years, many investment fingers have been badly burnt for one fairly simple reason: lack of homework. Anyone looking at this market should ask how many likely tenants there are in relation to the number of rental properties in the area, who are your prospective tenants, what do they want, and how much are they prepared to pay for it? Every area is different, so I ask letting agents what type/style/price bracket of property they always wish they had more of. All too often, the answer doesn’t match the types of properties investors have been buying. The sector offers some interesting opportunities.
The average price of a buy-to-let property is £160,000, so the temporary change to Stamp Duty falls right in the heartland of investor country. So not only is this the cheapest time to buy for several years, but investors have been given 12 months to avoid the Chancellor’s tax tentacles.
The rental market is also a beneficiary of the weak sales market. Yes, there has been a flood of ‘accidental landlords’ (those who let out their property in lieu of selling it) in Prime Central London, but rents in the wider market are rising, and, although capital values are falling, it means yields are improving. The attitude to renting is also changing.
In 1918, 80% of households rented their homes, but by the 1980s, this number had fallen dramatically to just 10%. However, during the past 20 years, the number of households renting has reached almost three million, an increase of 40%. And as a society, more of us are living alone it’s been estimated that, by 2021, 35% of us will be living solo. In broad terms, there are five main tenant groups key workers, students, single expatriate city workers, expatriate families and professional sharers. To me, it seems that the last is by far and away the most reliable market.
People in their mid-twenties who have left university are always keen to share a property before buying for themselves. They don’t want to live anywhere particularly smart or expensive, but they do require good transport links and plenty of bars and restaurants. Some 25% of UK graduates take their first job in London (more than the combined totals of Manchester, Birmingham, Leeds, Edinburgh, Glasgow and Cardiff). This means there’s consistent demand year-on-year, which, in turn, provides investors with very high occupancy rates.
Three-bedroom terraced Victorian cottages in secondary areas, which can usually be adapted to offer four bedrooms and two bathrooms, make the best investments. It’s always worth keeping an eye out for changes to things such as transport connections for example, the East London Tube line large company relocations, extensions to hospitals or universities, and regeneration areas.
Some of the people who did best out of the market through the boom sowed the seeds during the early 1990s. This slump is no exception: play your cards right over the next six months, and you could come out of this very sweetly. Believe me, there are a lot of private investors, a lot of funds and rich people on the sidelines, waiting for someone to say this is the time to buy. And when that happens, there’ll be an almighty scramble.
City-centre mistakes
I strongly question whether there was ever, in fact, a ‘demand’ or a ‘shortage’ of, for instance, two-bedroom flats in central Leeds. So, when all these similar properties were being marketed, mainly to investors, the demand for them was perceived—rather than genuine and the prices were hugely inflated.
The planning and development procedure can take years for a large scheme, and even then, it’s not until there’s an established price history for a particular product and area that the market itself dictates what the properties are genuinely worth (rather than what the developer says they’re worth). Of course, by the time there’s a track record of deals and an established ‘open-market value’, the developers will have sold all the units and moved on to other projects. Why should they care? They’re in business to win planning permission, build and sell in the quickest time possible.
Garrington Home Finders (020–7376 6780; www.garrington.co.uk)
