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44: Property trends to watch out for.



As experienced investors like Warren Buffett tell us, get yourself a good business in a good sector with good management. Conversely, do not get yourself into a poor business in a poor sector and poorly manage it.


As you are almost certainly aware, a key strength of property investment is your ability to use other people’s money (OPM) to leverage up and purchase a property - that can deliver positive cashflow and exposure to capital price gains. If you purchase a property with a good rental yield that more than pays for mortgage costs, maintenance bills and fees, you will strongly benefit from any rise in property prices. As an example, if you borrow 80% of the purchase price - if prices rise by 10% in a year, your return on investment will be 50%. Compared with the stock market, this type of performance is impressive. It’s almost impossible to borrow money to invest in the stock market – so you cannot leverage using OPM. Furthermore, there are significant tax benefits from investing in property – particularly with the new UK SIPPs starting in April 2006.


The purpose of this Special Report is to highlight the most important trends to consider when investing in property – to protect your downside and capture upside opportunities. The insights are aimed at UK investors, although the same general trends also apply USA, Australia and other European countries.


Cars and transport: Expanding populations, increasing car ownership, stricter environmental constraints, low road construction spending and smaller families will lead to a massive increase in vehicle congestion. Surface travel will become more difficult and air travel will likely be taxed as fuel prices, emissions and the threat of global warming force governments to discourage air travel. For property, this means more people will want property close to good rail communications, as close to the main business districts as possible. The suburbs will get more and more clogged with cars – no new roads will be built. Wealthy people will want a central apartment and quiet country weekend residence. Large houses in the suburbs will be in less demand as the size of families reduces. This will therefore put a premium in future years on:



Industry: The future growth industries are likely to be banking, services, media, technology, leisure, tourism, internet, transport/logistics and bio-technology (also retirement centres). The highest GDP and jobs growth will be in these sectors. Manufacturing in the UK will continue to decline, and public sector jobs growth will flatten and then likely decline. Because manufacturing and public sector jobs growth has been focussed in the North, Midlands and Scotland – this will likely subdue any house price rises in these regions in future years. In the south and London, the rapidly expanding population, jobs growth and increase in the services sector will likely lead to further house price rises. If you think about where these industries are located and purchase properties close by, you’ll be investing in a growing trend area. Failure to take this into account could reduce your investment returns. Examples I can think of which rank strongly on growing industries are:



The only heavy or manufacturing industries I can think of which will probably do okay and hence support house prices in the area is the oil business in Aberdeen (also possibly Teeside).


If I imagine an area which has overlapping fields of services industry (banking, media), leisure/tourism (Olympics, City, West End) and retirement (pied-a-terre apartments) it’s Limehouse in E14, or Soho in W1. I find it difficult to imagine buying a good value one bedroom flat in such a location would not be a good bet. Other areas that are close but re-generating will will likely see a big benefit in infra-structure investments are Hackney, New Cross/Peckham/Brockley and Stratford/Canning Town.


Interest Rates: if interest rates go up, then property prices normally either stablise or drop a bit. If interest drop, property prices often go up. So it’s best to buy when rates are high! In the UK, rates have dropped from 4.75% to 4.5%. Its open to interpretation whether the rates are “high”. I personally believe globalisation has lead to low long term inflation because so many goods and services are imported from low cost countries such as India and China. Its likely GDP in the UK will drop to the 1.0-2.5% range for the foreseeable future and hence, as long as oil prices do not go above 70$/bbl, inflation is likely to remain low and interest drop from there current levels. Hence, early this year is likely to have experienced an interest rate “high” and been the best time to buy.  I’m probably the only person I’ve met to think this, but I believe property prices in the London and southern areas of the UK will rise by 5-10% in 2006 because of a combination of:



Cycles: Property price rises normally go in cycles – with London leading off, and the north experiencing a ripple effect. London lead in 1996 and tailed off in 2002. The North ripple started in 2001 and finished in late 2004. London prices have not moved significantly for 3 years, yet GDP growth has been 4% and wage inflation about 5.5%. Unemployment as dropped in some areas to practically zero (near Heathrow and Gatwick). I would anticipate London price to start moving higher towards year end and into 2006. Un-trendy areas likely Slough – in the western high-tech corridor close to Heathrow will probably particularly well. They always say to buy when the doomungers are at their most vocal – this was probably in early 2005. But there are still plenty of doomungers around, so it’s probably a good time to buy!


Risks: Consider the risks – bird flu, terrorism, riots, interest rates, floods etc – if you purchase a property, its best to make sure it’s not on a flood plain, not in a high risk area for riots etc. But don’t get too hung up on this – no risk, no reward as they say. If you never took a risk, you’d never make an investment. Business is all about managing risks and learning from mistakes. Because of the above risks, I would personally not invest in southern Thailand, but anyone that does at this point in time might actually be investing at the best time if the risks never pan out (I prefer the lower risk areas - like Clapham in London!).


Summary: Best to invest close to where you live – to give the most control and ability to add value to your portfolio. It’s always handy to live in an area where the GDP growth potential is high and you can invest in that area – for the really keen investors, without being too direct, in most places on the map below I cannot see any reason why in the long term, property investment will be successful.    







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