A Time to Invest?
by Richard Cotton
It is no secret that buy to let investors have had a tough time over the last twelve months, compared to the strong capital growth they had enjoyed during the recent boom in property prices, but opportunities are now opening up for experienced investors across London and the south east.
There are plenty of investors who are waiting to take advantage of the slowdown in the UK property market and seek new opportunities to expand their portfolios, as long as they can secure bargain prices at 25% less than they were a year ago. This usually constitutes a 15% reduction in asking price from autumn 2007, followed by a further 10% discount negotiated off the asking price.
Prompted by the belief that the £37 billion bank rescue and the recent interest rate cuts to just 3% will be the turning point in the banking crisis, those buyers with equity who are able to access the mortgage market, are beginning to actively seek properties which have undergone significant reductions. There are some sellers who unfortunately are forced to sell their property, which can result in an even keener price in return for a quick sale.
Following the Chancellor's meeting with the major banks, at which he put pressure on them to pass on interest rate savings to customers, many tracker mortgage rates have come down by 1.5% and we can expect to see the cost of fixed rates come down over the next couple of months. However, it seems unlikely that banks will pass on further interest rate cuts and indeed rates could start rising again in 2009, so investors with decent deposits wanting to take advantage of more affordable lending need to move soon.
Leading house price indices such as those from Halifax and Nationwide, show price falls approaching 15%, but investors are factoring in further falls by seeking reductions of 25%. Sensible investors also realise that the days of instant gain in the property market have passed, and they are prepared to take a long-term view. They are balancing the risk of the market dipping by more than 25% in the short-term, with the risk of being caught short when the market picks up, and further falls in the short-term are expected to be quickly wiped out when the market recovers in 2010.
There is nothing left in today's property market for short-term speculators, hoping to profit purely from capital growth. But for long-term landlords, whose primary concerns are income and cash flow, prospects are brightening. Rents have dipped in central London, due to the surge of rental properties hitting the market which have failed to sell, but yields are remaining quite stable. When prices were rising strongly, yields - rental income versus the property's value - were falling. Now, as property values are dropping, these yields are protected. There has also been an increase in demand for rental properties, resulting from a surge of would-be first time buyers who are unable to buy and so are renting instead.
Landlords with experience, who are willing to take a long-term view, can benefit from current market conditions, as long as they secure a good price, in good locations, in areas of strong tenant demand. As the market begins its' recovery, which we expect to happen in 2010, landlords can also expect to benefit from strong capital growth as the shortage of new homes takes effect and prices return to an upward curve.
Richard Cotton is Divisional Head of Residential Agency at Cluttons
www.cluttons.com