601: General Election Outcome - A View for Property Investors
We thought it appropriate to give our mid monthly Newsletter update a little early this month, to capture the ramifications for property investors of the outcome of the UK General Election.
Another Shock More Uncertainty: Property investors and builders, developers and the construction industry hate uncertainty. This is exactly what we got by 10pm 8 June when the Exit Poll was announced leading to confirmation of a hung parliament, with the Tories being propped up by the Ulster Unionist Party by midday 9 June. The Tories have a slender 2 seat majority with DUP backing, albeit this is helped by Sinn Fein not taking up their seven seats in parliament when it comes to parliamentary voting. For all UK unionists, the good news was that the SNP lost a lot of seats and their ability to call another Scottish Referendum is much diminished. UKIP were destroyed. The Lib Dems won a few seats. Labour were the clear winner of new seats after the young voters came out, and many of the UKIP voters switched to Labour rather than moved to vote Tory. It was a disastrous outcome for Teressa May who gambled on winning an increased majority in a snap election that was not really required, only to lose the majority and lead to a drastically weakened government. The longer-term ramification is a large increase in the chance of the Tories needing another election in the next 2 years, with the Tories now wandering whether they should jettison Teressa May, or back her to lead the negotiations a poison chalice if ever there was one.
Scenarios: The most likely outcome is that Teressa May survives, then is discarded once the final Brexit deal is done thence a new election will be fought by a fresh leader, possibly Boris Johnson someone that can engage at grass-roots level and match Corbyn in engaging around the countries in informal rallies something that worked very effectively for him. Lets make no mistake, having Corbyn as Prime Minister would be catastrophic for the property industry particularly buy-to-let investors because of the eventual outcome which would be:
Higher import costs
Lower asset prices
Large public sector
Smaller private sector
Higher borrowing costs
Crashing house prices
Stagflation or recession
The country massively borrowing money and spending on social projects that deliver little real value a big increase in the inefficient wastage of money
Previous Labour Governments: With respect, the younger voters will not have experience of depressions eventually caused by Labour government overspending, over regulating and nationalising businesses they wont have noticed the 2008 crash even, never mind the turmoil created in the 1970s. When the private sector takes flight investing overseas instead - taxes go up and tax revenues drop whilst spending increases it eventually leads to financial crisis any economist knows this. Its simple maths. Also, Corbyn is a Marxist who wants to re-distribute wealth from the rich to the poor. For anyone in the bottom 35% of wage earners or on social security, of course its an attractive proposition such hand-outs, but it eventually leads to financial crisis and a poorer country one that looks like Venezuela or Cuba. Both countries have a similar social mantra as Corbyn who is the most left -wing leader of the Labour party the UK has ever seen even further left when looking at history books - than Michael Foot way back in the 1970s they were called loony left at the time.
Just a 2% Swing Does It For Labour: If at the next election Corbyn gets a 2% swing towards Labour e.g. Labour 42% to a Tory 40%, they will be swift into power. This of course is the underlying concern for all property investors the door seems to be half open for Corbyn and the hard left to step in and tax the living daylights out of land owners and property investors. They may even try and seize property for instance if it is empty and the owner cant prove it is being used. There would undoubtedly be far higher property taxes, new land taxes and far more punitive property and rental regulations.
Massive Drop In Housing Supply: With this as a back-drop, we see the amount of home building declining dramatically as uncertainty in the new minority Tory government, Brexit negotiations and the threat of Corbyn taking control start to affect confidence. We then expect the country to drift into a period of stagnation with higher general inflation and likely house prices in the doldrums. The UK is getting a reputation for shooting itself in the foot internationally this should slow down inward investment, damage confidence and lead at best to only muted house price growth due to a shortage of supply.
Depressed State of Economy: With the increasing population and lower building levels, we expect the house crisis to worsen although rents will probably stay depressed because the economy has slowed and the levels of inward migration have dropped off, post Brexit Referendum current net migration has dropped to 255,000 from the peak of 360,000 reach before the referendum. What the country needs is a massive building programme to boost social housing and private sector new homes, plus rental homes but we are likely to see a dramatic slowdown from already low levels in the next few months as banks and builders become cautious and the Brexit negotiations get off to a bad start.
The EU Has Decided It Has To Be A Messy Divorce: Lets face it, politically the EU has decided it would be catastrophic for them if they gave the UK a good deal they want the UK to look humiliated, backs against the wall and beaten into submission as punishment for going ahead with the divorce. Meanwhile the Tory governments hand has been dramatically weakened it is unlikely to be allowed to go for a clean hard Brexit the EU will know the UK cant just get up and leave the room so we are likely to see a soft Brexit that sees the UK pay high costs, still be tied into border controls, customs requirement, many EU laws, free movement of people and border control that the majority of the UK did not really vote for this would drag out the process for years. Frankly its shaping up to be a very messy divorce and it will take 4 years henceforth to recover.
Depressed Housing Sector: For these reasons we are rather depressed about the overall prospects for property investment both house prices, higher rents and economic growth in the short-medium term, then rather concerned about the medium-longer term threat of a Marxist Labour government running the UK if Corbyn eventually gets into power, with all the taxation, rent regulation etc that comes with this model.
It Will Get Worse: The contrarian could argue this is the best time to buy but lets face it there is a very high likelihood things will get far worse before it gets better from hear on so our current guidance is to be very careful what one invests in and make sure you have a war chest of ready cash in case interest rates rise and/or Corbyn gets into power. We could be looking at a prolong downturn for property as the Labour party would force prices down to help the lower wage earners get properties through rental or purchase creating a big shock to the housing sector. What we are saying is it would be foolhardy at this time of uncertainty to make major commitments and one should look for some positive trends and stability before taking any big plunge. A Corbyn government could be just around the corner. Its difficult to paint an upbeat scenario.
Position But Dont Act: Just to position yourself, a Labour victory would see a short-term boost to northern cities when the public sector was expanded places like Newcastle, Blackburn, Bradford could do better for a few years before the downward spiral starts, but our feeling is if Corbyn gets into power its not even worth playing this investment because the downsides are bigger than the upsides. Central London property prices would be hammered hard and with a Labour government in power, we cant see any area that would see property prices rising they would instead drop sharply.
Step By Step Low Risk Strategy: Which brings us back to the step-by-step value strategy one of improvement, renovation, extension, upgrade, loft conversions etc. any property modification that can clearly create another rental or sales unit at low cost for rapid rent or sale in a high demand area is a good strategy to adopt in these uncertain times. Its wise for small-medium sized investors to avoid large home building investments those with large capital outlays with long lead time from build-commitment to sale. For instance, you may be able to execute a loft conversion for £35,000 in 6 weeks that can then be rented out for £500/month and add a gross £60,000 (£25,000 net) of asset value to your portfolio. This would beat building a new house that might cost £130,000, add a gross £200,000 (£70,000 net) of asset value to your portfolio that takes 7 months to build then 4 months to sell or you could rent out for £1000 a month. The time-risk-cash sink and uncertainty in an eventual sale of a new home in 11 months time would be too much to bear compared with a rapid loft conversion.
Cost Cutting: In such uncertain times, its a good process to:
Take a close look at cost, bills, electric, gas, insurance see if you can get better deals or re-negotiate
Take a look at rents see if there are any opportunities to increase
Take a look at the length of leases see if its worthwhile extending these or not
Keep good accounts to make sure you can scrutinize and interrogate costs
Write a list of cost saving options an action tracker then go down the list implementing the highest ranked opportunities
Write a list of value creating opportunities itemise: 1) upgrade type; 2) cost; 3) capital value increase; 4) rental increase; 5) time it takes; 6) pay-back time for the investment. The best return on investment opportunities you should then target implementing particularly the ones with fast pack-back time.
Make a list of key maintenance issues then tackle the highest priority safety-integrity concerns and items that also benefit the tenant low cost but high impact
Make a list of all gas safety certificates, expiry dates, get one person to do all of them regularly for a lower amount also improving safety
Itemise a list of safety improvements that help tenants whilst lowering risks - and implement these through risk assessment and action tracking
We hope this Special Report has help give some insights into property investment in these uncertain times. If you have any queries or comments, please contact us email@example.com