Quality Speaks For Itself

There is value in some UK Buy To Let

Posted in Markets by Carl on December 15th, 2008 06:11pm

What a couple of weeks I’ve had! With all the talk about UK residential property prices crashing I thought we should do some investigating on behalf of our clients, firstly to see if it is true and secondly to see if there is value to be had.

Before we trampled the streets, Ash and I spent two weeks conducting some desk research where we thought the value might be. Initially we thought the secondary market with distressed sales at auction might be a good place to start. We quickly found it is a very time consuming task and potentially expensive with no gain (you have to do all your research and employ a solicitor to conduct all the searches in advance of the auction – i.e. you have to be ready to exchange if you win in the bid and you might not!). Also if we are looking on behalf of our clients apart from the time involved, we are not doing anything they couldn’t do themselves. It’s also a very slow process so we’d only be able to satisfy one or two clients a week! Additionally there is new government protection in place to postpone the repossession process for another 6 months. I think this part of the market has not hit the bottom yet!

After a chance meeting with a friend in the industry my attention was quickly drawn to the New Build market within the M25 principally. The reason? Well as you’ll be aware there was an explosion of new build over the last two years which, as much of it nears completion, has coincided with the credit crunch and the global recession. With a lack of liquidity to support the purchase of the massively overly inflated prices that were being asked by developers there is a lot of unallocated stock available. Developers have seen their land bank values reduce dramatically, they have breached many of their banking covenants and their share prices have subsequently tumbled. In short they need cash more than profit at the moment! If a development is near completion they need to recoup costs; if it is a long way from completion it will be mothballed and won’t be started again until the market picks up in 2010! So we have a moment in time when completed new build will be sold very cheaply; but as we have found out it is only available to those people that can buy in bulk and move very quickly. The individual investor does not really have much of a chance.

With this in mind we have been on the streets of London visiting tube stations I didn’t even know existed! We have seen in excess of 40 developments from some of the biggest names and some small independent developers. One thing is for sure that unless you visit the development in person you have no idea whether it is a good investment opportunity or not. Only one Developer has a brand that means something – i.e. a consistent quality that is carried from one development to another. Others have both excellent and very poor developments in their portfolio.

Having completed the task (for the moment!) of visiting sites, we have whittled down our choice to a small number of developments that we are currently negotiating on for our clients. If we can’t get the deal we want we will keep searching until we do. What we now know is that whilst price and location are very important drivers of rental yield and future capital growth, (as sure as eggs are eggs prices will rise it’s just we don’t know when because there is a fundamental issue that demand exceeds supply!), quality is also a very important factor. My goodness there has been some terrible developments built over the last couple of years!

I’ll keep you posted on how we get on……