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460: UK property investor's update

02-14-2013 team 


London Boom:  The UK buy to let is generally quite buoyant in London and south-east England it is generally very good. The closer you get to high paid jobs in cities, the better the letting demand. There seems to be armies of low paid workers servicing the rich and super-rich in London. Demand of flats and rooms in London is particularly strong. Waves of migrant workers from all corners of the globe looking for accommodation have exacerbated the already tight market and creating a rental boom. There just aren’t enough properties to go around in London and too many households. People are sharing, multiple families living in the same house or flat and rents are rising constantly because of supply side inadequacies and demand side boom.

Buy to let landlords:  have been put off letting for years because of new regulations, increasing demands, powers of tenants and challenges getting borrowing from banks. Council inspectors, the threat of legal action at every turn and bad tenants has discouraged many landlords from increasing their  property portfolios. Despite all the hype, there is not enough private sector landlords, and the public sector is not filling any gaps – instead they increase regulation, licensing and legal requirements – that ultimately lead to a further tightening of the market.   But first time buyers are squeezed out even more than buy-to-let landlords because they have little credit history, deposits are so huge, rates are high for first timers and fees unusually high. So this has been forcing first time buyers to rent far longer. Buy to let landlords have not filled the gap – as migrant workers continue to flock in. Hence the rental market continues to expand and remain tight.

Rising Costs:  In 1990, a Fulham flat cost £75,000 and required a 5% deposit - £3,750. In 2013 a Fulham flat costs £350,000 and needs a 15% deposit – £52,500. You can see the amount of money required to but a flat has risen about 13 fold. But also consider the amount of printed money in circulation is about ten times more than 1980-1990 period. Anyone that says there is no inflation is crazy. There’s been a debt, printing, inflation boom – and it will continue for some time before accelerating then crashing into deflation.  But the Bank of England has printed so much money now – it is starting to appear in lots of bubbles around – including London property prices, rental prices and general UK inflation. It will accelerate the two tier society we have created in the UK – inflation always does. It most affects the poor and the rich normally use the printed money to investor or speculate and make high returns. Then if you try and tax them, they will either move business or move abroad – it normally leads to lower tax revenues eventually. What they need to do is stop printing money – but they won’t – and eventually rents will rise further, so will house prices, gold, silver, oil and works of art. No surprize retailers of lower end clothing are going bust – because the young low paid workers are buying cloths anymore – they can’t afford it with high food, rent and fuel prices.  

No Building: It’s a sorry state of affairs that we predicted seven years ago in our early Special Reports. There just is not enough building occurring. Building firms find it tough getting borrowing from banks, planning regulations are very strict, nimbyism puts a stop to most development and developers risks are just too high for the paltry rewards. Builders and developers are simply not making much  money at this time. They are steel reeling from the house price declines of 2008 onwards. Although property prices have risen in south-east England – this is barely enough to keep up with inflation. The quoted inflation rate is 2.7%, but if you consider the basics like housing, rent, fuel and food plus tax increases – inflation is running at more like 6-8%. So real property prices continue to decline – as do wages. If you get a way increase of 2%, and real inflation is 7%, your living standards will decline by 5% a year. For the last five years, living standards have undoubted been declining for almost everyone. One could argue that rental increase of 6% are only just keeping up with inflation.

Rising Material Costs: In any case, even if a house or property is build, it has tiny proportions, has extremely costly materials, building labour costs have sky-rocketted, environmental and safety regulations have raised costs, and plot sizes are tiny. Gone are those Victorian days when a whole city or town could be built in 5 years – and each house took two weeks to build. There are less quarries, preparation of building material requires huge amounts of energy and energy costs have skyrocketed as the UK has start importing oil and gas.  Builders are making meagre profits of 10% on massive debts and risk in a shaky economy, so it’s no wonder so few properties are built. It’s not likely to change any time soon.

Landlords: So the outlook for cash rich landlords remains fairly good as long as unemployment does not rise sharply. In London, all evidence points to rapidly rising employment, stable unemployed rate, booming population, no significant building, average wages for the middle and lower levels dropping and people needing more rented rooms and small one bedroom flats and studios. The lower end of the market continues to boom despite the stagnant overall economy. The upper end of the London market is also very good – since many wealthy international people want to move to London to either escape places that have suffered massive economic hardship (e.g. Greece), to move from insecure countries (e.g. Syria, Tunisia, Egypt) or to avoid high tax in other countries (e.g. France). Just as an example, there are now thought to be 230,000 French people living in London and its rising rapidly – they are opening a huge new school in Wembley because the South Kensington School is full. They now find good restaurants and lots of culture – for the French, there’s never been a better time to live in London especially with the 75% taxes being instigated in France.

Small Units in London:  For property developers and buy-to-let investors, there’s probably never been a better time to buy large ex-council or run down houses in the cheaper areas of London, and knock them into studios, flats and room rentals. Of course you will need to follow all the regulations (HMO, flats, fire protection etc) – and rentals are likely to remain high in areas with good rail-tube communications to the area with jobs – and the more secure areas. Yields as high as 7-8% can be achieved – far higher than the 4% common around 2007. The increased regulations leads to far less competition – because fewer people can handle the risk, afford the time-hassle and exposure. So if you are able to provide reasonable quality let’s all to regulation – you’ll likely find rents continuing to rise and little competition from other landlords.

Economy is Not On The Mend: On the general economy, it looks most likely we will continue to stumble along this stagflationary phase for quite some time. Just do not bank on a big improvement in the UK economy – it’s almost impossible to happen because:

·         Private sector debts is just so gigantic

·         Public sector debt is extremely high – 80% of GDP

·         UK North Sea oil and gas production is in terminal decline increasing fuel import costs and reducing tax revenues

·         Taxation is so high that this cannot be increased without cause a recession

·         Manufacturing is in the doldrums and will remain so because the UK is normally not competitive compared with China, India and other developing nations

·         The population is aging – more elderly people with less innovation

London: The highlight is the population boom in London – mainly driven by inward migration and the large families that people in London are having compared with other regions. The financial services industry continues to do reasonably well as more international money swills around London.

Northern Depression:  In northern and rural areas, house prices will continue to be depressed with industry in decline in most areas and public sector jobs cuts depressing things further. The rental market will be reasonably strong because so few people will be able to afford to own a house. Many retiring people will sell their properties, live off the proceeds and move into small rented accommodation and units. So the lower to mid rental market will probably be fairly robust, but property prices will remain depressed. As a rebalancing occurs away from public back to private sector employment, the north and rural areas do worst simply because Labour created so many new public sector jobs in these areas. The only light at the end of the tunnel could be a Labour victory in 2015 – after which they will try and spend more money on public sector jobs in the north again before likely completely bankrupting the country (it’s almost bankrupt already with a deficit of 8% and borrowing of 80% of GDP).  

Currency Decline Will Lead to Inflation: Eventually, the printed money will lead to far higher inflation and gold and silver prices will skyrocket, but this is the subject of another newsletter and previous ones we have written. The Pound Sterling used to be a strong petro-currency, but since the big oil and gas decline started in 1999, Sterling has weakened and this will continue. As Sterling weakens further, this will drive up inflation – simply because the UK has such gigantic imports of goods and services. Prices of all these will rise.   

Stock Market Mirage: If you are in the stock market in the UK at this time, its best to get out right now. It’s like a top to us. FTSE100 at 6350 – wow. Time to get out. We predict share prices will drop sharply in early April – early May. Only six weeks away now. Time to get your money off the table (unless they are in gold or silver mining shares). This feel good feeling in January and February normally happens – because in the UK everyone is back at work producing and consuming to the maximum. Then in May – everyone starts exiting the UK and spending their money back home (migrant workers) or on holiday (super rich and middle classes) – so the GDP will drop sharply and it will look like we are heading into recession again. At this time, the stock market will probably correct down at least 15%. If you have ridden this wave from say FTSE100 at 5500 to 6350 – time to exit. Then get back in again after it’s dropped back.

Bear Market – Yes For Certain: We are still in a long term secular shares bear market that started in 2000 and is likely to end around mid 2017. Another four years left. As inflation increases, just like it did in the 1970s – it will look like the FTSE100 will be rising, but in inflation adjusted terms it will be correcting downwards from its peak in 2000 at 7000. Its already lost 50% of its value in inflation adjusted terms, and should lose another 20% by the time it ends – and everyone hates shares. We are not quite there yet, it needs a final one or two down legs and high inflation – which looks like it could be a few years away.

We hope this Special Report has help give you – as a property investor – some interesting insights. One needs to ignore the current mini-euphoria and focus on the next stock market down-leg and increasing inflationary pressures. For now, low end central London rentals (small units) look like a winner if you can handle the increased regulation.    


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