Quality Speaks For Itself

Opportunity in the UK?

Posted in Markets by Dipen on November 20th, 2008 06:09pm

Opportunity in the UK?

The cyclical nature of investing has never been better highlighted than the conditions that are prevalent in the world today. At our launch in February, we highlighted the overheating in the UK market in our document ‘Property Investment – The Facts and The QIS Approach’ and stressed that caution was the keyword for the UK. We predicted that a major fall resulting in negative growth was likely, although the speed and size of the fall has surprised us all. However, the key point from our document was that professional and long term investors should focus on:

1) Pursue an Investment Strategy and do not be deterred by sentiment. Rely on Fact.
2) Investing is for the long term.
3) All markets are Cyclical so focus on the bigger picture and not just the short term snapshot.
4) Never ignore Change.

So what are the facts for the UK? Well as we all know, liquidity in mortgage markets and particularly the Buy to Let market has dried up, deterring buyers and forcing sellers to delay their moves or substantially reduce their asking prices. The immediate effect of this has seen a dramatic fall in the average house price in the UK with falls of around 16 to 20% being the norm. However, this sense of gloom and panic has created potential opportunities in the new build and secondary market as the double whammy of the virtual shutdown of the mortgage market and housebuilders being perilously close to breaching their banking covenants has forced prices close to a ‘generational’ low in my opinion.

So how do I arrive at this conclusion? Well the macro outlook for property, particularly in the South East, has not materially changed. In fact if anything, it has worsened. There will be a huge undersupply of homes in the future as housebuilders cancel projects in the current climate, resulting in the delay of homes coming online once demand returns from buyers. In fact with the number of new homes coming online in the South East expected to drop by two thirds over the next two years, any perceived overcapacity will quickly disappear and will be followed by a sharp rise in prices as property once again becomes more valuable. The current demand constraints seem to create an oversupply of property and this has lead to us being offered substantial discounts on both new build and secondary market properties within Greater London. These discounts are driven by hosebuilders and owners needing cash rather than profit and are truly creating generational opportunities.

So what next? Well as I said in our newsletter we are focussing on discounts of around 40% on market value and we are seeking projects that create instant equity BUT also are cash positive. By this I mean that we intend for the yields to comfortably cover any financing costs, even at today’s inflated levels. By the way, we have access to BTL financing options and even though the rates are higher than before, these should almost be viewed as medium term bridging facilities, as rates will normalise in the future – remember even this is cyclical! Ash will be talking about this in more detail soon.

As in so many cases, the best time to buy is when all around you are fearful of doing so. It is impossible to call the bottom of the market, but I feel that in terms of the value from bulk deals, we are very near the bottom. There are many people hoovering up property at these current levels and we intend to do the same.

If you would like a copy of our Property Investment report that I refer to above then please email us at information@qis.uk.com.