It is always better to take small bites and chew well, rather than a big one which you cannot chew well. The same principle applies in property, especially if you don't have a big mouth, or maybe you could have a big mouth but not chew too well!
From the smaller stock of properties we have sourced over the years in Central London, none have gone down in price, only upwards; some more than others. The majority of these have been ex local properties, as once upon a time they could be bought really cheap, with awesome rental yields. Here’s an example: a two bedroom property in 2009 could be bought for £275k in Westbourne Grove W2. It came with a long lease and a low service charge, the rental would be around £550 pw thanks to social housing. This gave an annual rental of £28,600. In short you would put £75k in the deal, and you would get £20k income after all expenses. This is a brilliant return, given the location is also superb, however this deal was not as easy to sell as it should have been. People were still hesitant for no reason, except for the reason that most people are hesitant most of the time; and funnily for the wrong reason they foolishly rush in. With property in a good location and at that kind of entry level you can afford to be a bit bullish. Looking back from the environment we are in at the moment yields like this were a God send. These rentals were short lived, you would have had two to three years to make some money on the rentals, then the government introduced a cap on the amount of rent it was prepared to pay. However the actual money was not made on the rent but the capital growth of the property. The rental yields were just a bonus.
I remember one client came in from Sussex to look at a property in Westbourne Grove. He came to see the property and his feedback to me was that the property was ugly, hence he did not want to purchase it. My reply was that he did not want to live in the property so it didn’t need to look pretty. The idea was it should be a pure investment. The numbers looked pretty and this was where the focus should be on, as well as the location, as this would be the driving factor for future growth.
Even really low priced, dingy properties go up due to one factor which is the location.
On a couple of projects we are about to start work on we have gone back to the drawing board. One property is in St John’s Wood which we were originally looking to convert to a family home, we have now gone back to the drawing board to see how we can carve it up into smaller units as we have a window of time before we commence works.
Despite the fact that a house is in keeping with the area and the street, smaller units are better for rental and sales. The environment has changed and will change in the coming months. The appetite for property in the UK will not be satiated, but the palette will evolve according to the environment.
We are even exploring the options for a HMO. Most avoid converting to a HMO, as it devalues the property, and it is difficult to remove once you have a HMO status. The reason is HMOs offer affordable living spaces in expensive areas. Councils like these to be in their borough as it means the low paid can afford to live there, otherwise they can be priced out of the market.
However we would be looking at this from only two points of view, one is the income it will produce and the other is how we can refinance to get the funds out of the deal and move on.
The focus now will be on smaller rather than larger lumps. Or larger lumps which can be chopped up into smaller ones.
My opinion is smaller lots will rise faster in price and liquidity starting from the New Year. When purchasing smaller properties it may be prudent to purchase in a vehicle of a Ltd company in preparation for the coming tax changes. This is especially the case if you are looking to buy and hold. These changes will start to creep in from 2017 in a graduated way, so there will not be too much opposition. This is however an unintuitive tax, akin to paying tax on the turnover of a company rather than the profits.
Purchasing within the vehicle of a company will rid the investor of this coming tax. A company is easy to set up and cheap to run. On the resale too it will benefit the incoming purchaser, as they will be purchasing a company rather than a property.
We have secured a couple of low cost properties with a view to exchanging prior to Christmas. Both ex locals, with low service charges and yields of over 5% which is a good yield in this market. Rentals yields have dropped as prices have increased. They start from £450k which requires a deposit of £112k. If you’re a first time buyer, or you know a first time buyer, you may qualify for the government grant which will help to fund the deposit, thereby reducing the amount you have to invest in the deal. Both properties come with a long lease and are available now!
Call our office if you are interested in these deals.