By Martin Skinner,

Following on from my bright side article, I’m pleased to be able to report that the positive mental attitude approach appears to be working out rather well.  Investors (including my own little family office) have bought no less than 13 auction/receivership properties through Inspired Asset Management in the last month alone – with more sure to follow them.  That’s more than we transacted in the whole of the previous 12 months!

Dynamic duo | Inspiring interns

To achieve this we’ve been considering and discarding 1,000′s of other opportunities – more than ever before.  As you might imagine, organising, viewing and thoroughly appraising this volume of residential property is very labour intensive.  Like many other post credit-crunch businesses, we have far less resources at our disposal having dramatically reduced overheads and staffing in the wake of the squeeze.  So I would like to say a big thank you to the unsung (and unpaid) heroes of the City and the West End.  We have benefitted hugely from a series of very smart, diligent and hard working interns, most notably Louis, Kunal, Agne and Akvile who will all no doubt go on to achieve great things.  The help they have given us has been priceless.  Thank you!!

Our Joint Venture partners at Urban Share have also attracted a number of new equity investors and are close to securing their senior debt facility, so we’re clearly not the only ones making headway despite the choppy economic conditions.  Rather than blind optimism these developments are undoubtedly the result of the plain hard work and persistence that fuel most growing businesses these days; and a smile always helps.

On the macro-economic front there has been quite a lot of good news recently with employment up by 143,000 during the traditionally difficult Dec-Feb period and unemployment down by 17,000; the trade deficit reduced from £5.7bn in Dec to £2.4bn in Feb; and GDP growth again establishing itself despite the spending cuts. 0.5% growth has been initially reported for the first quarter and this is likely to be revised up, while 1.8% growth has been recorded for 2010/2011 as a whole despite an estimated 1.5% GDP fiscal tightening.

However, real incomes (i.e. after the effects of inflation) are still falling, retail spending is down and growth is likely to remain muted as public spending cuts take effect and the private sector continues to hoard its profits.  In general this should be good news as the government gets out the way and the economy rebalances from debt fuelled consumer spending and imports towards business investment and exports.

I believe this shows we are getting off our backsides and doing more with less.  The next couple of years are likely to remain tough as lower real incomes mean we feel poorer. But with this trend forecast to reverse in 2013/2014 and house prices, at least in London, expected to push beyond their previous peak, we will in due course start to feel wealthier again.

Meanwhile the North/South house price divide is continuing to widen dramatically as I and other Southerners forecast back in late 2009.  London is clearly driving this local growth on the back of global interest in our relative advantages, not least our discounted exchange rate and stable legal and political systems.  For example Galliard reportedly sold 80% of its new flats in the Strand for between £1,500 – 2,000 psf in just 8 weeks, with 90% going to overseas, typically Asian, investors.  Interestingly, the IPD’s recent annual results also highlighted the fact that Inner London (where we focus our activities) has outperformed all other areas on a total return basis over the last 10 years, including Prime Central London.  This is because Inner London yields are much higher than those in Prime Central London, while capital growth is only marginally lower.  And if you like London you’ll really like Jim O’Neill’s (Chairman of Goldman Sachs Asset Management) recent article entitled Brics herald a golden age for London.

IPD residential regional performance 10 year

George Osborne’s decision in the budget to finally link stamp duty land tax (SDLT) on bulk purchases to the average unit price, instead of the total transaction price, could actually make a real difference and eventually lead to a wholesale market developing.  And a barely reported amendment to housing benefits will mean more than 88,000 extra people need to rent rooms just as the unintended consequences of the House in Multiple Occupation (HMO) Licensing regulations start to bite and their supply is cut off.  We already expected rental growth in the young professional market to outstrip the rest of the market and issues like this will simply serve to push rents up further.

In conclusion it is my firm belief that investors should be planning their routes into the London residential property market right now, while the supply and demand imbalance is most acute, before the recovery becomes too established and opportunities for super profits dry up. Institutional investors may also start dipping their toes in the market, but are sure to lag behind the more entrepreneurial and often underestimated buy-to-let and private equity brigades.  So there’s still time for us to thrive.

By Martin Skinner,

Martin Skinner

The last few weeks have been frantically busy and while lots of big deals are on the horizon, fundraising and transaction setbacks are still frequent and frustrating.

On the personal front I’ve just returned from a trip to New Zealand and best man duties at a close friend’s wedding.  In fact I wrote most of this on the long flight back, having written my speech at the last minute on the way over.  The big day was fabulous and was followed by a tour of the North Island together with Ben and Anna the newlyweds, their daughter Trilby (hats off to them for that name) and Ben’s family.  Some honeymoon! I was there when we heard the terrible news from the South Island and my heart goes out to everyone in Christchurch.

Ben and Anna's Wedding in New Zealand

While I was out there corrupt leaders were falling like dominoes as people harnessed the power of everyday web tools like Google, Facebook and Twitter.  The debate rages as to whether the situation will deteriorate without the ‘regional stability’ these leaders used to provide.  Personally I believe increased transparency and accountability will lead to better government in the long run and that must be a good thing.  Short to medium term the instability will increase the flow of capital out of regions like the Middle East and into safer environments such as prime and fringe prime London property.

In terms of the UK economy, discussion is finally turning towards growth. While the downside surely has to include rising interest rates, there is also much to be positive about.  David Smith recently published another superb piece describing how the ‘feel good factor’ was lost when consumer price inflation overtook wage inflation, an event that paradoxically contributed to higher employment and lower interest rates.  He also highlighted a report forecasting a return of the feel good factor next year, when broad inflation is expected to fall back below wage inflation once more.  At the same time, development luminary Mike Slade listed many more reasons to look on the bright side of property life in his recent Property Week article.

I’m sometimes accused of being optimistic as if that’s a bad thing.  Yes, I underestimated the credit crunch and agree it’s important not to get too carried away with wishful thinking.  At the same time, it’s also important to recognise the positive signs that are beginning to appear.  When I was playing a lot of tennis, we were always told to focus on where we wanted to hit the ball and it clearly improved results.  With timing and location critical to success in the property market too, I’m looking forward to some excellent years and returns ahead – particularly for investors in London residential.  As real estate emerges from the downturn, London’s diverse, much vaunted and ultimately proven strengths will continue to draw both investment and human capital in ever greater numbers.

Having just gone through a recent batch of reports from the big UK residential agencies, I thought the following key points and charts on London residential property were worth sharing:

“…an astounding 70% [or £2.9 trillion of the £4.1 trillion total market value of UK residential property] is held as equity”.

“…it is London’s status as a world city that sets it apart in value terms from the rest of the country.” Yolande Barnes, Savills, Residential Property Focus Q1 2011

Savills are now forecasting a rise of 33.4% in prime central London house prices over the next 5 years.  See the full report here.

Available Stock vs Price Growth | Savills

“Outperforming their national markets, the cities of London, New York, Moscow and Hong Kong are sought after by the world’s richest households and are at the forefront of a truly global market ~ the residential sectors of these global cities have more in common with each other than they do their domestic markets” Yolande Barnes, Savills, Spotlight on Four Global Cities, Feb 2011  Read the full report here.

5 Year City Performance | Savills

“Global economic growth is now running at pre-recession levels contributing to wealth creation around the world which is pouring into London again. ~ London’s reputation as a ‘safe-haven’ investment location, combined with geo-political concerns elsewhere around the world, most recently for example in Egypt and Tunisia [and now Libya], have helped draw buyers into the market”  Liam Bailey, Knight Frank, The world’s most desirable residential market: The Super-Prime London Report 2011.

P.S. Check out www.beek.co This is recently married Ben Knill’s new and innovative technology venture and it’s shaping up to be a huge success!  I’m proud to say that we incorporated early versions of his interactive 3D walkthroughs on our consumer website Nice Room as early as 2003.  Prospective tenants loved it and we got a lot of remote bookings as a result.  As consumers increasingly shop online and seek comfort in online research before buying or travelling, its potential is enormous.

By Martin Skinner,

Martin Skinner

Mark Weedon at the IPD has been teaching the property industry one of its best kept secrets.  Despite residential property appearing to produce a lower net rental yield compared to commercial property, it has actually been on par over the last nine years when commercial value depreciation is taken into account.

“These findings indicate that relative residential income return is significantly devalued by its superior capital growth. In fact, residential property can deliver as much net income receivable as a percentage of original outlay to commercial for an equivalent sum invested in both. Therefore, the residential sector is now able to boast that it not only offers superior total returns but also that the cash returns from rental income can match commercial even if the percentage yield and income return remain noticeably lower” (2010, Mark Weedon, Head of UK Residential Services, IPD)

9 year income performance residential vs commercial

This means that, despite the rhetoric, UK residential property not only outperforms commercial property (and all major asset classes) on capital growth, but it also matches commercial for income return too.  The arguments from institutional investors against investing in this £6 trillion asset class are steadily being whittled away.

You can find the full International Property Databank (IPD) presentation here and their biannual research reports are available here.

Additionally, why not take a look at some recent Jones Lang LaSalle research forecasting house price inflation rising back towards its long term trend of above 7%p.a.  It makes an interesting read. Nationwide estimate that house prices rise by 2.9%pa in real terms, whereas researchers broadly agree that commercial property depreciates by around 1.5%pa in real terms.  This reflects the fact that commercial properties typically become obsolete and require replacement much faster that residential.

JLL residential price increase forecast

So no wonder UK residential has historically provided a hedge against rising inflation, rising in value by 274% in real terms over the last 50 years compared to a 55% drop in commercial values.  Those interested in comparing the overall returns from residential with other asset classes should have a look at Tim Watts’ article from last year.

On the ground I’ve also noticed the effects of the ongoing supply shortage during the traditional moving season of November and January. Demand for vacant rooms and flats in our own buy-to-let houses in London’s Docklands was so enormous that we pushed rents up considerably and got them straight away, on top of substantial advance rents from Chinese students.  Yep, we should have asked for more…

Our vacancy rate is 0% and our partner Urban Share has also enjoyed near 100% occupancy for most of 2010, even after increasing rents by between 10-40%!  According to Knight Frank, residential rents in London have risen by an average of 16% over the last year.  They offer very rewarding and attractive returns for equity rich investors increasingly – and rightly – concerned about rising inflation.

Spareroom.co.uk (the UK’s leading website for finding and letting rooms) told me that they are now placing more adverts for rooms wanted than rooms available for the first time since they began in 1999.  That’s really quite remarkable when you think about it.

With no significant improvements in the debt funding environment or in local authority demands for affordable housing, supply will continue to fall short. At the same time, babies continue to be ‘born every day’ and more and more migrants are moving to London, whether from southern Europe or northern England.  I think I’m safe in making a new year’s forecast that London and the south-east will experience substantial increases in real residential rents over the next 5 years.  And that’s great news for current and future landlords.

Even the recent shock drop in UK GDP could prove to be good news for investors in London residential property – assuming that the recovery resumes relatively swiftly.  The shock has without a doubt pushed back future interest rate rises, while a weaker Sterling will continue to attract cash rich foreign investors.  There should also be some more exciting property deals available to experienced parties that are prepared to look and work hard enough.

Sophisticated investors interested in deploying capital into London residential should contact Inspired on 020 7358 8130 to discuss the ways in which we can enhance your returns.

By Tim Watts,

So why do institutions consistently invest in all other asset classes!

I think it’s fair to say we’re living in uncertain times, something reflected by the lack of stability and confidence in many of our investments. So it is staggering, to say the least, that the residential sector continues to be ignored by most institutional investors. It is over ten years ago that some of the great and the good prepared the foundations of the Residential IPD index. It has recently reported its ninth set of figures and, compared to the total return of commercial property, wins hands down. No matter which way you look it, however you twist the figures and whatever time frame is taken, the deeper you look the stronger the argument for investing in residential.

Residential outperforms other asset classes

At our student event a couple of months ago, guest speaker Rob Weaver clearly showed how residential not only outperforms all commercial sectors, but actually has a lower risk profile too. This is particularly apparent when considering the volatility of returns against equities.

Lower volatility (risk) with Residential

To highlight this superior performance, let’s take a hypothetical £100,000 investment made in 2000 – the start of residential IPD figures. As of December 2009, that investment would have been worth £235,000. The same sum invested in city offices would have only amounted to £125,000.

Of course, focusing on a specific time frame doesn’t necessarily provide us with an accurate picture overall. Yet fans of residential can point to higher returns over virtually any period. Go back as far as 1960 and residential IPD shows a house price growth of 274% in real terms. For commercial property, that figure is -55%. That’s right. A difference of 329%! Just think how your pension fund would be looking if it had invested in UK residential over the past 35 years!

Residential Property vs Commercial Property

This is why Inspired is committed to funds linked to UK residential performance. And that’s before we even take into account that growth in house prices, whilst a key driver of total returns, is not the sole factor. Income stream also plays a significant role throughout the life of the investment and adds to the attraction.

It’s not for me to expound the reasons why institutions have chosen to ignore residential. Those that argue they have not been able to should look at those that have made a clear commitment to the sector – most notably The Welcome Trust. Trust me, I’ve heard the excuses and that’s all they are; excuses rather than informed and rational investment decisions. For me, the question isn’t why part of a fund should be allocated to residential. Instead, it’s why commercial should form part of a fund that invests in residential.

UK residential property - long term outperformance

Most private investors and fund managers that have invested in residential will, I’m sure, quietly confirm that they were some of the best investments they ever made. That’s why it is so important to offer investors the opportunity to benefit from such resilient returns.

By Martin Skinner,

Martin Skinner

Well after keeping radio silence for what seems quite a while, I’m proud to introduce a new member of the team to everyone.  Jack Christopher Skinner was born on the 26th March 2010!

Jack Christopher Skinner

Jack has already chosen his football team (Tottenham Hotspur needless to say) and is also starting to show signs of his parents’ impatience.  Like most youngsters these days, he’s also better at the high tech stuff than they are and is fully operational with his own Facebook, Twitter, You Tube and Google Buzz accounts.

Jack Dribbling for Spurs

So as you can imagine, life has been even busier than usual in the Skinner household.  In fact, this is the first time I’ve really been able to sit back and reflect on how dramatically things have changed over the last couple of months.

We’ve created a new family, the country has new leaders (hopefully better than the last lot), and Inspired has made its first great property acquisitions with Urban Share. Even the sun has come out!

The three properties bought so far include this 3-bed house in Bush Road, Surrey Quays, SE16 bought for £228k

Then again, some things haven’t changed and we still love London Residential Property.  Their recently published residential IPD (Investment Property Databank) report fully supports my own and Inspired’s views.

Aside from linking to the report here and the multiple award winning IPD here I thought I’d just share a few of the highlights with you:

“The residential total return index has experienced real [after inflation] growth of 86% [in the 9 years] to December 2009, compared to 33% in all commercial property. This equates to 7.2% per year in residential against 3.21% per year for commercial. The real capital growth in the residential index is the same to the total return in the all commercial property index. The residential income return on top of the capital therefore represents a real out-performance “bonus”.”

“Over fifty years real house prices have risen by 274% compared to a -55% fall in real commercial property value. This represents long run annual residential value increase of inflation plus 3.3% compared to inflation minus 1.2% per year for commercial property.”

“Residential has represented the best real return to a December 2000 investment [against equities, bonds and commercial property] at every stage throughout the previous 9 years.”

“The annualised rental growth over the 9 year period was 2.23% for residential compared to just 0.45% for commercial.”

“Residential market let investment has consistently rewarded investors with greater returns than commercial property and other asset classes since 2000 despite lower income returns.”

residential property vs other asset classes

“The long term real performance of residential represents a hedge against inflation and volatility whilst maintaining impressive performance relative to other sectors.”

Property Risk Reward Spectrum

“The fall from peak to trough is smaller in the residential market cycles.”
Source IPD Residential Index 13/04/2010, The Strength of Residential as a long term Investment

As you’ll know if you’ve ever met me, I’ve long been an outspoken advocate of UK residential property investment – especially in London.  Discovering this report (as well as Jack’s arrival, of course) has made my 2010 !!

If you’d like to discuss the property opportunities we can offer, would like to raise finance for an amazing site, or you’ve discovered a distressed scheme or portfolio that might interest one of our funds or clients, we’re always keen to hear from you.

I’m also collecting high tech baby accessories and bargains/donations are welcome – particularly if you can offer me a great deal on one of these little beasts !

Awesome High-Chairs

By Tim Watts,

Tim Watts

Rising student numbers, consistent annual rental growth and an ever increasing appetite from institutions all bodes well for strong performance in this sector but is it really that easy?  Past experience has taught me that when someone tells me it’s easy they have either been exceptionally lucky or really don’t know what they are talking about and are completely fee driven. The private development of student accommodation is a relatively new phenomenon and would appear to provide an excellent investment opportunity which is particularly resilient in more challenging economic times.

forecasts look good

However, universities are starting to slash places as the government funding squeeze starts to take effect. You like me probably thought that education and the Health Service were not forming part of future government’s reductions in spending plans. I wonder what part of the Health Service in due course the government feel is not part of the Health Service! It should also be remembered that this is only the beginning of far greater cuts that will be necessary in order to help reduce the UK’s public borrowing deficit.  So perhaps those successful in investing in this sector will need to undertake a stricter due diligence process before proceeding to the acquisition stage.

For me any acquisition has to tick the following four boxes before further consideration would be given to the proposition:

• The quality of the university
• Location of accommodation to the university and social environment
• International student population
• Supply and quality of existing and anticipated accommodation

These four key considerations should not be considered independently of each other and as this investment sector changes and develops so does the weighting that one should attribute to these four considerations. For example the supply and quality of existing accommodation would not have been an issue in almost every University town less than ten years ago. Now, however, in certain areas not all student accommodation will let, and the requirements of what the student is expecting continue to evolve.

overseas student

In my view the trend in overseas students for a particular university town should now be the key driver. If one takes the view that there is likely to be a continued squeeze on places it is important to remember that there are no restrictions on the number of international students. Whilst there is a cap on British undergraduate fees of £3,225 there is no cap on fees for those outside the European Union. Quite why the British tax payer is subsidising members of the European Union when British applicants are being turned away is not a topic for discussion here but I am sure one for the Daily Mail.

By focusing on this trend and being alert to the requirements of accommodation for the international student there is every reason to remain optimistic that the student investment sector should continue to perform well. For example, with Government forecasts indicating a further 125,000 international students over the next decade it is easy to see why London continues to offer investment opportunities. However one final word of caution. Just as the bubble burst in the commercial market partly due to the weight of money, there is a point, as with all investment decisions, where the answer should be “no” rather than the ridiculous get out clause of acquisition due to the need to balance a portfolio.

By Martin Skinner

A love affair – my story
I’ve been a passionate advocate of residential property investment particularly in London since I bought my first investment property out in the far reaches of London’s Docklands in 2002.  My love affair with residential began much earlier though…

I spent my formative years from 7-18 growing up in a big house on 3/4 of an acre of land in East Sussex.  My parents had settled there after many years of travelling and teaching in far off places like Uganda & the Solomon Islands, where I was born.  It wasn’t a particularly expensive house or in a particularly expensive area but it had a big garden, big trees, a gravel driveway and a garage big enough to play table-tennis & snooker in.  And I had a bigger bedroom than I remember any of my friends having – so they often came to my place – I loved it !  An Englishman’s home is his castle and I didn’t have to pay any rent…

…  until I moved up to London for university in 1998 and had to pay rent.  From 11 years old onwards I’d always worked to earn extra money to pay for extra toys – first skateboards, then bikes and finally sports cars – and I really didn’t enjoy having to throw a whole £300 a month away on something I’d always enjoyed for free.  Have you any idea how much faster I could make my car go for £3,600 (12 months’ rent)??  My parents didn’t seem to share my pain.  “I could buy a 3-bed ex-council flat, rent out the spare rooms to friends and live rent free if only you’d guarantee the mortgage”  I explained. Mum would have helped but my dad, who was a tough old sod from an army background, threatened to divorce her and move out if she took such a huge risk on me.  And then my car got stolen.

Anyway, as soon as I had the salary to support it without a parental guarantee I bought my first 3-bedroom house.  I paid £220,000 for it in March 2002; quickly knocked the kitchen into the dining room to free up an extra bedroom and let the 3 rooms out.  I received enough rental income to pay the mortgage, all the bills and still left me with £500 a month (and my own bedroom).  I then re-mortgaged it for £70,000 extra just six months later.  It would have taken me at least 10 years to save up that much money from my £34,000 a year job and I was convinced; this was how I would earn my money.

Institutions – still flirting
Meanwhile institutional investors rarely share the passion I have for the sector and consistently struggle to get their products beyond first base.  A number of large UK institutions announced their intentions to invest last year but almost a year on they still haven’t got them off the ground.  The main reasons appear to be:

• More active management required
• The recent rebound in market values
• Lower net yields compared with commercial
• Short-term tenancies (longer-dated income is preferred)
• Reluctance from banks to release large volumes of discounted stock

In addition to this many financial advisors struggle to differentiate between an investor (or client)’s home and their investment portfolio and therefore look to diversify into commercial property over residential alternatives.

These are not insurmountable challenges however and some including Invista Real Estate and Inspired Asset Management (who I advise) with their Urban Share Fund are succeeding with their products.

Why not just stick with commercial property?
Assets are generally valued based on multiple of their current and future income (in this case net rental yields).  And rents are still under downward pressure for offices, industrial and in particular retail where sheer weight of money meant more space was developed.  Combined with changing consumer and occupier behaviour (online shopping for example) the recovery in commercial property is likely to be much more muted.

In residential meanwhile there was a housing supply shortage/crisis before the downturn even began.  The demand pressure is building and the supply-side is hamstrung.  National house builders had to shrink their businesses to survive the recession and could take 5 years to get back to where they were in 2007 and smaller developers cannot raise the development finance they need to produce new stock.

Hybrid variants of residential including affordable housing and student accommodation are attracting more attention from investment funds but even they are both still in short supply; particularly in London where according to Savills student numbers are growing at 15 times the rate of new supply.  London is also where waiting lists for council housing have reached such extreme levels that dedicated workforces are being recruited to persuade those on the lists to look to the private sector for help.  Private landlords of course prefer to steer well clear of tenants on housing benefit after suffering huge losses when the government diverted payments from landlords to tenants who then frequently failed to pass them on.

Anecdotal evidence from West London agents suggests rents are increasing again and at quite a pace.  Knight Frank is forecasting house price increases of 34% in London over the next 5 years.  The Centre for Economics and Business Research (CEBR) expects prices in the UK as a whole to rise by 20% over the next 3 years as banks step up lending and interest rates remain low.

Historically residential property has proven to be a relatively safe asset class hence the expression ‘as safe as houses’ and:

• outperformed other asset classes
• offered higher income yields than bonds
• offered an effective hedge against inflation

Whether the powerful few step up their investment programmes in Residential Property or not it’s clear that in the years ahead many students and young graduates are going to have a much harder time finding accommodation they can afford to rent let alone buy.

If you would like to learn more and/or discuss some of the pressing issues faced by our next generation please book your tickets for our University Challenge event.  We will be hosting a discussion involving fund managers, property managers and students at the May Fair Hotel in London from 6.30pm on Thursday the 11th February.  The last few tickets are available now on http://inspired.eventbrite.com.

By Tim Watts

Tim Watts

As a new year starts, out will come forecasts on what the “experts” think will happen to residential prices this year. The question is how accurate are they?  I would strongly recommend a degree of caution on making investment decisions in this sector based on these forecasts.

Let us take a look at some of the forecasts made at the beginning of last year:

• The Royal Institution of Chartered Surveyors, Simon Rubinsohn  -10 to -15%
• Deutsche Bank, George Buckley  -15%
• Capital Economics, Seema Shah -25%
• Lucian Cook Savills -5%
• And finally one of the most accurate that I could find was from Trevor Abrahmsohn at Glentree International at -2%.

Investing in the residential investment sector as opposed to residential development is in my view for the mid to long term investor. It would seem sensible to consider what the “experts” are saying before deciding whether to invest but is that really the case?

I remember sitting round a table as a consultant to Lloyds Banking Group just after the takeover of HBOS in January last year when the question was asked as to where I thought prices would be by the end of 2009.  Yes, I hear you saying, it’s easy to forecast after the event but genuinely my view was that the range would be between -2 and +2% and that it was more likely to be in positive territory. The room fell into silence and only those that knew me well wanted to understand  why I was in such an optimistic mood. Nationwide have recently reported that for 2009 the annual  average house price growth was 5.9%.

House prices rising, but the forecasts said rain?

Of course there have been wide variations with some properties showing falls of as much as fifty percent. The reasons for this I shall cover in my next article on the essentials of residential investment.

It still amazes me how most institutions do not have an allocation within their pension funds for residential even though the track record of residential has consistently outperformed other property asset classes over almost any time frame. The individual investor knows only too well how residential has performed as part of a long term investment strategy. Residential is however capital intensive which is why at Inspired we shall have a strong focus on providing residential funds which enable investors with a minimum of £25,000 the opportunity to invest.

UK residential property - long term outperformance

Interestingly in the Sunday Times Money supplement this week there is an article titled “ shares beat property in profits race”. This headline took me somewhat by surprise as unfortunately I did listen to some experts who pursuaded me to invest in shares as well as residential. Whilst I think looking back too far in time as a measure for future performance is also a dangerous route to go down it stated that investing in a house since 1959 showed a rise of 273% or an average annual real return of 2.7% according to the Halifax. Shares, wait for it, have returned 1180% over the past fifty years giving an average real return of 5.2%. This I simply couldn’t believe until I read the small print. This figure included dividends without which the figure would be only 86% or 1.2% in real terms. In other words half that of residential. What this article failed to consider was the fact that residential can and normally is let and generally will provide similar initial income returns to that achieved through a dividend.

Listen - the facts speak for themselves !

So in conclusion I would suggest that the facts speak for themselves no matter what the headlines say. Don’t put off your weekend away due to the weather forecast nor take too much notice of residential forecasts if you are investing for the long term. Residential has continally outperformed all other property asset classes and should definitely form at least part of a balanced investment strategy. Have you been reading this to see what my forecast is for this year? It will be announced and discussed at the next Inspired event set for the 11th February, see our event site for further details.

By Martin Skinner

Right the snow’s over everybody and it’s time to get this show back on the road!

Unfortunately it’s likely to be quite a long and bumpy road so I thought I’d kick the years blog off with a priority Top 3.  Hopefully it’ll help keep things focussed on the journey towards financial stability.

The road ahead

Priority numbers 1 & 2 are “Location, Location …”
I did have a bunch of great articles with lots of lovely tables and charts demonstrating the likely future variances in house price inflation between key regions however partly as a result of being pleasantly distracted by all the new social networking sites and events (and of course the snow) I’ve managed to misplace them.  Still with traditional forecasting having been all but discredited perhaps we shouldn’t rely too much on them anyway.  Therefore I’ll just share my opinions with you and you can comment if you agree/disagree.  If you happen to have the tables/charts to hand then please feel free to post them too.

It seems certain to me that the North/South divide is going to widen in the years ahead as 1) investors prioritise properties in the safest, scarcest locations and 2) the [new] government  is forced to reign in its spending.

Northern regions are more reliant on the state than southern regions and they will suffer more as a result.  Demographics were forgotten somewhat during the boom and financial engineering was often prioritised over fundamental property investment criteria like location and future supply & demand.  Sadly many investors found that agents, property clubs and developers forecasts for rental income and re-sale values evaporated and have been left sitting on flats that in some cases could take a decade or more to get back to where they were estimated to be at their peak.  And that’s assuming the local populace doesn’t move to the south in search of better pay (or just any old job).  The same can of course be said for many foreign destinations – let’s not get into Spain or Dubai here.

The good news for those that have holdings there is that Prime West London is pretty much back where it was in 2007.  Cash rich investors have continued to fight over flats and houses in Mayfair, Knightsbridge and Notting Hill throughout the turmoil.  Once again the old adage Location, Location, Location has rung true and I believe it will keep ringing loudly for at least 5 years.  Investing in the best location you can afford will continue to pay dividends.

Central London

Priority number 3 is Yield
Many buy-to-let investors (and others) have managed to hang on to their portfolios despite significant negative equity because interest rates have been reduced so dramatically.  In most cases residential property investors have in fact benefitted from significant improvements in their monthly margins as rents have only dipped about 15% overall – as compared with about 50% on commercial property – and they’re now beginning to drag themselves back up.

This means income arbitrage is back on the menu.  If you can only get 0.5% interest from the Bank of England or a c4% dividend yield on equities then property starts to interesting above that level.

But what about rising interest rates for those looking to use leverage or with debt already in place?  The debate will continue to rage on this in the months and years ahead I’m sure (hasn’t it always?) however it’s clear that they will have to rise at some point and it therefore makes sense to build in some margin for error on the yield.  This can be a little difficult if you’re borrowing 50% or more and following the golden location, location, rules because yields on Prime Central London properties can be as low as 3 or 4% gross.

So my tip, and I doubt the big fund managers will like this one, is to stay prime and consider more management intensive residential uses such as student accommodation, young professional accommodation and short-let hostels etc.  If you were offered the choice between a long lease on a bank in a regional city centre at a yield of 5% or a flat with a 9.5% gross yield (7% net) in Central London what would you choose?

Urban Share bedroom

If you fancy learning more about student & young professional accommodation why not come along to our event on the 11th February where we’ll reveal many of the secrets to successfully investing?

Andrew Goodwin senior economic advisor to the Ernst & Young Item Club wrote the best article I’ve read this week (in Property Week).

By Martin Skinner

While researching and considering this blog I’ve been travelling to Poland with my family for Xmas.  My family consists of my fiancé Magdalena (and bump), my mum Heather, mum’s partner Bruce and myself.  We’ve just flown into a snow covered Poznan for our first Xmas in Poland with Magda’s family and my mind has naturally drifted towards Christmassy thoughts.

Santa dropping by

Like so many families around the world we’ve had a very tough year.  With such hard times so fresh in our memories and with such uncertainty ahead important questions are begging for answers.  Will the families get on well and have a great Xmas?  Will we have a better year next year?  And does Santa Claus really exist?

Clearly these are big questions and the answers will depend on your own beliefs and circumstances.  I’ll let you know how we get on in future blogs.  For now I’ll share a few of my beliefs and relate them to my specialist subject of investment and specifically investment in London Residential Property.

1. Fog is inevitable

I’ve had the good fortune to spend valuable time with some extraordinary leaders in both finance and property.  One great snippet I heard from a hedge fund manager once was ‘the world is full of fog; I’ve developed the vision to see beyond the fog’.

Fog

In reality even his vision couldn’t prepare him for the events of the last 2 years.  Despite this I do believe it’s important to come to terms with the fog and uncertainty we are suddenly so acutely aware of – and carry on with our lives.  Psychologically it’s probably the most important step we can all take on the road to recovery.

An uncertain environment offers great opportunities particularly when broadly recovering.  In this environment Inspired Asset Management (an investment business I advise) is fortunate to be fresh, new and without the legacy issues that will continue to hamper many of its competitors for years to come.  The first fund Inspired is advising on will be buying throughout 2010 and deals are likely to be considerably better than if future price rises were “assured”.

2. Fundamentals matter

Now more than ever when investing it helps to:

• deliver products and services people need or want
• target undersupplied markets
• focus on very specific known locations
• buy very selectively – ‘Alpha’ is a word used in financial circles to describe this approach to cherry picking assets
• generate plenty of surplus cash flow

We received confirmation just yesterday that the first fund we’ve helped to raise with Inspired has achieved its first close and will be able to make the first purchases – a great way to start Christmas !

3. Think long term

Short-term sentiment matters (perception is often reality) however good assets and businesses if they are well funded and in demand will generally normalise over time.  If they can be “farmed” effectively to generate plenty of cash flow they should do well without suffering from the risks inherent in short-term speculation.

Property in particular is an illiquid asset class and should generally be approached accordingly.  Five years should really be the minimum period to plan to hold an investment – of course if someone offers to buy at a huge premium then early sales should be considered.

London

Instead of always trying to second guess short-term movements in markets and assets I believe it’s sensible to look at where supply and demand forecasts are likely to leave gaps in the medium term and seek to fill one of those gaps.

Inspired’s partner Urban Share for example achieves 95%+ occupancy rates and generates 9%+ rental yields on residential properties in Central London and with population growth forecast to continue apace while construction supply is likely to take five years or more to recover we see a gap.

4. Luck favours the bold

Putting time in to research and test your market thoroughly is generally time very well spent and I’m a firm believer in planning to succeed.  It’s important to also bear in mind that you also have to be in it to win it.  Many procrastinate from the sidelines while most others choose to follow the herd (too late).

Those with the guts to drive forward into the fog with their headlights on will often attract others to their cause as they prove their concept.  At Inspired we hope a real passion for Social Media/Networking, collaborating and engaging with our clients & peers along with establishing a successful investment track record will help us to achieve this.

5. Network and make yourself available

We’ve embraced social networking and have made ourselves available through sites like Twitter, LinkedIn, WordPress, Ecademy, Facebook and YouTube and encourage others to do the same.

In the finance & property sectors leaders like Philip Calvert (IFA Life), Robert Gardner (Mallow Street & Redington), JC Goldstein (CREOpoint), Nick Tadd & Vanessa Warwick (Property Tribes and 4 Walls & a Ceiling) and Jaime Steele (North Financial) are true visionaries and if you don’t follow them or participate in their networks yet (10,000+ contacts) I highly recommend you do.

Doors have already begun to open for us and we’ve met some extremely innovative and passionate individuals and groups.  If you would like to know more about us or can add value to our network perhaps come along to one of our networking events.  Our next one is on the 11th February in Mayfair and tickets are just £49.95 each.  Drinks sponsors are also welcomed.

Doors Opening

And finally please have a very Merry Xmas and a Happy New Year

I suspect I’m not the only one pondering these subjects and while I have initially shared my thoughts with you I would be extremely keen to hear what you think too – please feel free to comment or indeed describe your own Xmas [belief/wish] list.

Now back to the festivities and the family.

Merry Xmas from Martin, Magda, Inspired & Stepnowski - !