How you can still win in a sluggish property market

Published 27th Dec 2009

With house prices stagnating, we look at the best ways to make a profit


House prices are likely to finish the year up by about 7%, despite dire predictions of falls of up to 20% at the start of 2009.

The value of the average property fell by 19% from a peak of £186,044 in October 2007, to a trough of £147,746 in February this year, according to the Nationwide house price index.

Confidence returned, however, with the market bouncing back 8% to £162,764 in November as the expected flood of repossessions failed to materialise and buyer demand outstripped the supply of property coming on to the market.

Growth next year is forecast to be modest. The Royal Institution of Chartered Surveyors (Rics) predicted last week that house prices would rise 2% at best with early gains wiped out later in the year by sluggish economic growth and limited finance for first-time buyers.

Simon Rubinsohn, chief economist at Rics, said: “The imbalance between supply and demand will continue into the early part of the new year, resulting in some further house price gains. However, the combination of more available property and rising interest rates will gradually exert a greater influence.”

Assetz, the property group, is the most bullish of our forecasters, predicting that average prices will rise up to 5% because housebuilders will struggle to build more property and interest-rate rises are more likely to be modest than severe.

Capital Economics, the research consultancy, believes prices could dip 10% as unemployment and interest rates rise, although it could be “several more months” before we get the double dip in prices.

Seema Shah at Capital Economics said: “The shortage of property for sale has been the main driver of recent house price rises. Once that shortage eases, the still weak economy, rising unemployment and tight mortgage lending criteria will result in renewed price falls next year.”

Capital Economics was the most bearish of our forecasters in 2009, predicting falls of 20%.

Investors hoping for less pedestrian returns from property in 2010 should look to prime London homes and specialist sectors such as student accommodation, experts said. Some student property funds have returned as much as 26% this year.

We look at the better performers of the year and how to beat a modest market in 2010.

Pick your area

House prices fluctuated widely across Britain in 2009. The highest rise was in the London borough of Westminster, up 18.2% to an average of £953,542, according to Findaproperty.com, the property data site.

Nigel Lewis of Findaproperty said: “The most vibrant markets have proved to be the upmarket ones, with larger houses and flats outperforming the sector as a whole.”

He said that the “prime platinum market” — the top 10% of properties by value — had gained 12.5% while the top quarter, including St Albans, Hertfordshire, and Reigate, Surrey, was up 9.5%.

“It’s very much to do with the amount of stock available in these areas — London stock was down 14% on the previous year. Interest from mortgage-free, cash-rich buyers is also a factor,” Lewis said.

Scotland was the worst performing region, falling 12.2%, whereas London as a whole saw values rise 7.1%. Brighton was the best performing city with an almost 6% rise in average property values to £291,147, compared with Newcastle where the average fell 11.8% to £165,856.

Lewis said: “Indications suggest that the mini-recovery is running out of steam. Asking prices are down and the positivity has left the market to a certain extent.” However, he thinks prime property will continue to outperform next year. “The biggest fluctuations will be in the mid-market, which is more susceptible to confidence and mortgage availability,” Lewis said.

Be cash-rich if you can

Investing in buy-to-let property could provide a better yield than cash next year — as long as you don’t need a mortgage, according to analysis by Capital Economics.

It found that investors could make a net yield of 2.3% on a £160,000 property if they could finance it without a mortgage, assuming rental yields of 6.3%. This compares with a rate of about 1.5% net of higher-rate tax from a typical fixed-term deposit account. By contrast, you would make only 1% if you could put down a 25% deposit, or £40,000. Rent would be £10,000 gross, but you would pay £5,400 interest on a mortgage at 4.5%, with operating costs and tax on top.

With a 40% deposit, the interest would be £4,320, providing a yield of 1.6%, but Capital Economics pointed out that the figures do not take into account stamp duty and refurbishment costs, and could underestimate mortgage interest rates.

“Investors (who use a mortgage to finance their purchase) must be betting on strong house price growth in the coming years to justify their investment,” the consultancy said.

Consider student accommodation

Investors have been lured by predictions that student numbers will rise 28% by 2014. Knight Frank, the estate agency, said rents from student property in London grew by an average 10% in the 2008-9 academic year, compared with a fall of 3% in the normal residential market in 2009. Student rents have consistently exceeded retail price inflation and the trend is expected to continue, according to CB Richard Ellis, the property consultancy.

Unite Group, Britain’s largest student accommodation provider, announced last week that the Unite UK Student Accommodation fund had raised £167m from investors, used partly to purchase five properties in London, Edinburgh, Exeter and Glasgow, previously owned by the company itself. The value of the properties has risen 18% over the past six months.

The Guernsey-listed Braemar Student Accommodation fund, launched in December 2008 and up 26% over the year, has a £27.5m portfolio comprising four halls of residence in Manchester, Bristol and Newcastle.

The properties are not affiliated with any one university. Instead, universities allocate students to specific accommodation. The fund hopes to buy and convert more properties to take the portfolio to £100m.

Marc Duschenes, chief executive of Braemar, said: “The recession is accelerating the growth in student numbers, with mature and foreign students in there, too. Student rent is a predictable and stable yield — you don’t have the tenant risk that you have with a commercial property portfolio.”

Investors must buy into the Braemar fund through an independent financial adviser or broker, with a minimum investment of £10,000. You can wrap it in your self-invested personal pension (Sipp).

Go commercial

Cohen & Steers, manager of Skandia’s £178m global retail investment trust (Reit) fund, is bullish on UK commercial property — particularly London offices.

Leonard Geiger, Cohen & Steers’ London-based senior vice-president, said the FTSE 350 Real Estate index — which includes commercial property companies such as Land Securities — could return at least 10% next year, partly from foreign investment flowing from the weak pound and a short supply of offices. However, Mick Gilligan of Killik & Co, the adviser, said: “We’re not positive on UK commercial property — a lot of company shares are trading at premiums to their asset value.”

Having said that, commercial-property funds, which invest in bricks and mortar rather than property shares, have trailed the market and may be a good bet in 2010.

Case study:

Students boost my pension

Roger Blaskey, 58, of Hale Barns, Cheshire, recently made his first foray into investing in student accommodation.

Blaskey, an accountant at the Manchester firm Kay Johnson Gee, invested a five-figure sum in the Braemar Student Accommodation Fund through his self-invested personal pension.

The fund, up 26% over the year, invests in student halls in Manchester, Bristol and Newcastle.

He said: “I like property. in the long term it’s a good investment and there are only going to be more students going into university. Braemar’s track record is good. I’ve been monitoring it for the past 12 months and it’s not too flamboyant — it’s just a steady, above-average performance.

“I already have commercial property in my Sipp. I had some spare cash and I decided to put it in the Braemar fund.”

Source: ' Sunday Times '

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