602: Property Investment Update
Low UK Growth: The UK economy is now officially the poorest performing major economy in the world – with meagre growth of 0.2% per quarter, slightly less than Japan and lower than all other G7 countries. Indeed, if it was not for the inward population migration the government is trying to discourage, there would not have been any growth. It’s only the immigration that is creating any growth – that’s at 335,000 people a year as of June 2016.
Brexit Uncertainty: The ramification of Brexit are starting to severely effect GDP growth – after Sterling plummeted 15% against the dollar and created higher inflation and a squeeze on incomes. Indeed, people are dipping into their saving at the highest rate for ten years – which is not a good sign. Where this is because inflation is running at 3% and the savings rate is around 0.5% (negative rate of 2.5%) and people are investing in either their homes or spending on a new car, or people are so financially stressed they are drawing down their savings - is debatable.
Labour Threat Hanging Over Business Community: The other reason for the drop in growth – we will see this manifest itself in the next few months – is the political uncertainty and the significant threat of an ultra-left wing socialist government getting into power for the first time since the mid-1970s. Of course if this did happen, our inflation rate would skyrocket, Sterling crash and taxation increase – this would then drive business and foreign investors to other countries as this turmoil swept the country and the Labour party embarked on another inefficient public sector spending spree along with the re-distribution of wealth from the rich and middle class to the poorer – with the appropriation of assets.
Combined Threat: The combined impact of Brexit and a Labour government would be financial crisis in our view – and this threat is of course putting a lot of investors off – quite rightly – also property investors.
Sluggish House Price Growth: We will probably see the uncertainties manifest in lower house price growth in the next year or so – as the political uncertainty continues. The Brexit negotiations are likely to go badly – just by design – simply because the EU bureaucrats have design it that way – to create maximum humiliation for the UK government – then frighten anyone else that might think about leaving the EU. Typical EU bully tactics. They blame the UK for the Brexit divorce and want to the UK to pay dearly for it – just like for instance a wife finding out their husband has been cheating on them – and can you blame them the shock and feeling like this?
Labour Promise Re-distribution of Wealth from Middle Class to Poorer: So much of the UK’s prosperity is centred around London and the financial services plus consumer spending across the country. The threat is financial services will head overseas – tax receipt will drop creating further pressure on public sector funding – thence the electorate get fed up, then make – in our view – the fatal mistake of voting Labour and having Jeremy Corby attempt to run the country. Corbyn known to be a form of Marxist – a protester – a person that loves Unions - and most business people think he is not fit to govern the UK. If he ever becomes Prime Minister, businesses – that pay the taxes that pau for the public sector – and many of their employees – will vote with their feet and hence tax revenues will drop, taxation will increase, inflation will skyrocket and unemployment will rise – not drop as Labour promise.
Two Scenarios: For property investors, there is a big quandary. If the Tories remain in power – longer term after the Brexit turmoil – the economy should pick up and as the UK wins more trade deals with fast growing global countries and differentiates itself from mainland Europe – its growth rate could start to outperform the EU say after 2020. But if Labour get in, then we forecast an economic crash of some shape or form – likely a slow motion train crash over 5 years. Initially people might think the increase in public spending will create an investment increase, but as the private sector shrinks and public sector increase – then tax returns would drop as unemployment rose – the economic depression would start. The UK would start going the way of populist socialist countries like Venezuela – eventually leading to very high inflation, shortages and disorder (remember Venezuela was one of the most prosperous countries in the Americas through to the 1990s before Chavez took over and destroyed the private sector economy with high taxes, nationalisation and regulation).
Sterling Weakness: What seems fairly clear is that Sterling will stay depressed at around the $1.25 to $1.32 per pound level until the Brexit deals are done – though it would in our view crash to more like $1 to £1 if Labour got in – with inflation running at well over 5%.
Housing Crisis to Worsen: What is also pretty clear is that neither the Tory or the Labour government are going to do anything serious about the housing crisis – the shortage of supply of properties. And despite very high property prices, it’s still not easy making money from building properties because of the excessive Nimbyism, regulation, cost of material and labour – along with sky-high land prices and lack of larger building plots for multiple property units. The cost of building materials is shooting up far faster than the perceived 3% inflation rate – despite oil prices crashing in August 2014. Some of this is due to Sterling weakness – but it must also be high UK energy prices and mining-building material manufacturing costs that are driving these prices up.
Build Levels to Drop: The Brexit and the political uncertainty are probably about 50/50 in importance – having both hit at the same time - this is of course not conducive to investing large amounts of money building properties at this time. Hence we expect building levels to drop sharply in the next few months as projects are finalised and new ones delayed. Of course this will lead to a further shortage of properties as inward migration levels remain high despite much of the UK being in recession. Let’s be honest and say that if the UK overall is growing at 0.2% in a quarter, it’s probably London growing at 0.4% and Wales and Scotland in recession by now. Of course all the uncertainty around Scotland and another Referendum by Nicola Sturgeon has significantly set back the Scottish economy in the last 1-2 years.
Smaller Units – Higher Rents: Probably the best strategy for property investors is to look at the highest rental demand areas and consider splitting properties into smaller units and having more letting units at higher rental prices. This is of course required now to offset the massive new buy-to-let taxes that have largely rendered buy-to-let investment sub-economic. Its only by driving yields higher one can expect to break-even on a cash-flow basis. It’s not good doing this in an area of poor rental demand though – since people will not want to live in small units. Of course it is critical to follow the HMO regulations and licencing if you take this route and comply with all safety and government regulations.
Splitting Houses: If you split a house into say 3-4 separate flats, it’s worth considering what asset price increase this would create – along with the additional rental per month – and at what risk/cost. If each flat is separate, it might not even need an HMO licence – and each until could be sold off separately, in case you wish to release some capital. The downside threat is Labour getting into power and rental demand crashes or Labour instigate further draconian taxes, fines and punitive punishments for Landlords – which is of course very likely indeed. Many private landlords would simple sell up and get out – because they would not want to tolerate this onslaught and potential damage to their reputations – an example might be giving huge fines for some damp patches in a bathroom caused by condensation that the tenants created by not keeping the property properly ventilated (trying to save themselves energy costs).
Inward Migration to Stay High: Longer term, we expect more foreign entrants into the UK and looking to take part in the UK’s vibrant economy in the London area at least – and as long as the Tories stay in power – we expect no massive turmoil – yes Brexit would create turbulence and likely a recession but at least foreign investors would not desert the country. But if Labour get in, which has a reasonably high chance at this time – and we would undoubtedly also have Brexit – then foreign investor would surely leave in droves and invest overseas – a depression would commence.
Divisive Politicians: We really don’t know which direction things will go in – so the uncertainty will continue as the politicians continue to mess things around – look at Corbyn, Sturgeon and May – it’s not a pretty combination – very divisive – throwing Brexit into the mix is not pretty. It does not inspire confidence by either the electorate or business and investment leaders.
A few things we can be sure about though is:
• Inward net migration levels will remain high – well over 250,000 a year as the global population expands and many desperate people choose the UK to develop themselves and their families – wars and harsh climates could actually increase the influx. Many others will just come because it’s a vibrant place to live, work and settle.
• House building levels will be depressingly low at around 120-150,000 units a year
• New home demand will remain at around 300,000 a year – around double the level of supply
• The population will continue to grow strongly – much of this is due to inward migration and also because foreign born families have larger families – and higher a fertility rate
• Sterling will remain under pressure creating higher inflation levels – any oil price rise above $50/bbl will exacerbate this issue
• General inflation will also feed through to property prices
The Bank of England may be forced to start printing currency again sometime in the next few years – which would also feed through to asset price bubbles in property – particularly in London (the reason why London benefits from this printed currently is the rich have access to this cash, then park it in property and they favour London property over other cities in the UK since this ultra-rich people view London as a safe haven.
We Are Due Another Recession: It’s been ten years since the last major recession – and frankly we are due another one. So don’t be surprized if confidence dips and this triggers a recession. Teressa May’s absolutely disastrous snap election that saw the Tory vote crash from 51% to 42% in a few weeks must be a lesson for everyone. Teressa May might be a good manager, but she is not a good leader. She is incapable with engaging with the broader population and it seems inconceivable that the Tory Party will fight another election with her at the helm. Simply put – people don’t seem to like her. Then they look at Corby and say “I like you instead”. The snap election did not appear to be based on policies or Brexit – it seemed to be a choice between whether people liked Corbyn or May – very superficial and very dangerous both economically, for security, socially and politically. This massive switch in votes has disturbed
Property Investment Areas: For the property investors – longer term some of our key areas of interest rate listed below – with a special mention at the end for lower cost options for younger people like Nuneaton and Tamworth.
Leafy Areas and Central Areas Best: The areas that generally do best in the longer run are city areas that have a “village like feel” – lots of trees, green space, water and nice cafes-restaurants-pubs. As a general rule, city areas are likely to outperform rural areas in future years as the UK population expands and land-housing scarcity hits cities with jobs. This is particularly true of cities like London, Bristol, Southampton, Brighton, Cambridge, Oxford and Reading. Nice market towns within an hour’s rail commute to London – like Newbury, St Neots, Kettering, Chelmsford, Gravesend, Fleet, Winchester, Woking, Guildford, Salisbury will all see property price rise sharply in future years we believe. In the north the best bets are probably Manchester, Harrogate, York and Leeds. Derby, Nottingham and Leicester all seem good value as well – and as long as manufacturing does okay with the Sterling weakness post Brexit.
In London, the top picks are probably around the Crossrail developments – in a 10-15 year timeframe:
· Soho-Tottenham Court Road
· Southern Hackney
· Shoreditch - Whitechapel
· Forest Gate
· Abbey Wood
High Tech Hipsters: We think all these will see increasing amounts of high-tech hipsters with young families – many international – moving in and setting up successful businesses. London will look a little more like a city Silicon Valley mega-project in future years as London post-Brexit becomes a magnet for international start-ups, particularly if the Tories remain government. Some of this action will be further north in Cambridge – and to a lesser extent Oxford and Reading. Shoreditch will be the centre. Even though Victorian flats in Shoreditch might be considered expensive at this time, we think in 15 years time they will be into the stratosphere. As the international rich and highly educated get richer and the poor or low paid workers stand still – all these mega-rich hipsters will be bidding up Shoreditch properties – and in areas around the tech hub like Hackney. Hence the 5 bedroom Hackney terrace that might be selling for £1.2 million today – is likely to sell for £2.2 million in ten years time. Property will get more “peaky” with spikes in global city centres rising even higher compared to rural areas as the super-rich bid up prices – with the proceeds of their IPOs and company sales. Soho is another excellent bet – it is becoming the Visual Effects (VFX for short) centre for London and this growing business will send prices in this small trendy quarter rising sharply in future years.
Creative Hotspots: For lower priced areas that could see a strong ripple effect – Deptford-New Cross and Forest Gate are good options, still low priced but quite central. Anywhere near the Kennington-Oval is a winner as well – in the slightly cheaper part away from the riverside South Bank area – this area is extremely central – and one can go west, north or east into the rest of central London with ease. Kennington – is positively influenced by the Nice Elms development is certainly worth considering. Further afield Peckham is still regenerating fast – and Elephant & Castle is also. A lot of wealth is also being created in North London with the tech boom around Shoreditch, so Leytonstone and possibly the more southern parts of Tottenham are both areas that will come up in the future.
Central-West: In West London, Barons Court or West Kensington – as close as possible to Earls Court – look good, and Earls Court itself on the quiet roads only – with the £3.5 billion redevelopment being well on its way – its best to buy second hand Victorian property in the quite streets though if you can afford it. Our view is – don’t buy new property because you give returns to the developer. Its best to buy second hand – say Victorian – property and upgrade-renovate and add value that way yourself. This is also true in the north of England and rural areas. Why pay a premium for new builds – when you can buy an older property that can be extended, converted, upgraded – with possible basement or loft conversions and space in a garden for a back extension.
Tamworth and Nuneaton: Finally, two of our favoured investment areas well away from London. It’s also worth highlighting these two towns that lie within an amazing 55-60 in train journey to London (Euston) despite being over 100 miles awat. They are Tamworth and Nuneaton. For young people who work close to Euston and want to live in a nice 3-4 bedroom house at low cost, they are certainly places worth considering living. It’s incredible how you can live north of Birmingham but still only spend 55 mins getting to London – that’s a very fast train and it seems not many people know about it.
Lodgers for Younger Investors: Just some economics that might tweak your interest. Let’s say you have a down deposit – a gift from your parents of £25,000. Then you buy a 4 bedroom terrace house in Nuneaton for £200,000. You work in London earning £50,000 – so you can easily borrow £175,000. You have no partner. You then have three separate lodgers each paying £450 a month rent (inclusive of bills, which you would have to pay anyway) – they might even be your friends - but certainly people that you like and have chosen selectively. That’s a rental income of £1350 a month. Your mortgage rate is 4% - meaning your mortgage costs per month (interest only) is £7000 a year. Your rental income is £16200 a year. That’s a gigantic profit of £9200 – and you still live in your own house and make a profit. You also save about £5000 rent yourself each year! That’s a net uplift of £14200 a year – and if the property prices increase by 10% - you can add another £20000 to that number – a total uplift of £34,200 – enough value to offset the student loan. Many mortgage companies allow two lodgers, you might find one or two that allow three. The message is – with minimal risk – and you would also be helping solve the housing crisis – a young person living in Nuneaton age 21 commuting to London can be earning an extra £9200 a year (and saving £5000 rent) whilst seeing property prices rising off the back of the ripple effect and living in a nice part of the world. Most Londoners spend 60 mins or more commuting each day anyone, so why not spend some quality time relaxing on a specious train working or reading or sleeping or eating – better than the tube anyway. Just an idea.
We hope you have found this Newsletter insightful and helps you frame some of the threats and opportunities in the current UK business environment. If you have any queries, please contact us on