Buy to let in London |
As you may know, I have been asked to give talks on the prime London property market by several private client law firms, banks and wealth managers. I have also appeared on Bloomberg, CNBC & Reuters amongst others.
And whenever I am being interviewed or doing a Q&A at the end of a talk, one of the main concerns I hear about London property is that it is overvalued because the yield is so low. Therefore buying a property and especially a buy to let/investment property in London is a mistake.
Ironically, it then transpires that many of the people who make this argument own gold or have clients who have done rather well through their investments in classic cars or art – none of which yield a thing.
Of course, just because something doesn’t yield anything or very little, doesn’t make them bad assets. There are many darlings of the stock market that yield nothing and yet have skyrocketed in value.
And I can hear you thinking: “Hold on McGivern! The firms that don’t pay a dividend are high growth companies that are reinvesting in themselves. That is an absurd comparison to buy to let property in London!”. And so it may seem, but I will return to this point a little later.
Buy to Let in London: Exploring Yield, Growth, and Investment Comparisons
The simple fact is that buy to let property in prime central London rarely yields much above the base rate as it is seen as a safe asset and indeed has been for several centuries. Nevertheless, let’s look at the yield argument.
If a property yielded 10% would you buy it and would it be a far superior property compared to one in London?
Well, I used to own a couple of houses near Sunderland. When I bought them in 2004 they yielded 12% and the base rate was about 6%. I sold out in 2007 having made 60% on my money, which was a pretty good return but it was a lot of hassle – the properties were worth £28,000 and £22,000.
Aside from the hassle (the letting agents at this level were a nightmare to deal with), the big issue is volatility. There are properties across the north of England that saw no capital growth whatsoever between 2007 and c. 2018. Indeed in the most extreme instances, there are people who bought in 2007 who were still sitting on a loss in 2018.
Meanwhile, if you had invested a buy to let property in prime central London, you would have made significant gains by 2014. And despite, the price falls over the last few years, this massively outperforms what has been happening in the higher yielding areas.
Unlocking London’s Investment Potential: Buy to Let Strategy Reimagined
Indeed, a couple of years ago a gentleman became a client of Mercury Homesearch, because he was frustrated with his property portfolio – he owned 32 properties in the north of England which yielded 10%, but had seen no capital gain in 10 years.
We found him a flat in Knightsbridge which is only three minute’s walk from Harrods in a quiet, attractive street. The flat has rented easily but more importantly, it will see significant capital growth, because of various improvements happening in the street.
More importantly, prime central London ALWAYS outperforms the rest of the country over the length of the property cycle and has done so for centuries. Of course, it may be different this time, but that is a dangerous assumption considering there is over 300 years of evidence.
So the fact that a buy to let investment in London has a low yield – it has almost always seemed more sensible to rent in London than to buy on a basic calculation – doesn’t mean that it is a bad investment.
Indeed, I was speaking to a gentleman from Sweden who has been renting in London since he arrived eighteen years ago. He is incredibly successful and has his own asset management company. He told me that throughout that period, he had worked out that it was “cheaper” to rent than to buy once all the costs had been factored in, but it “has been a dreadful decision” – prices have increased dramatically despite the fact that by “mainstream” calculations it made “more sense” to rent.
Maximizing Buy to Let in London: Unveiling the Land Value Dynamics of Property Investment
For many people, buying in London is like buying a high-quality bond whereas high yielding properties in the north are more like junk bonds and there are other issues too.
This has to do with one of the greatest misconceptions about property. There is an obsession with house prices, but that is misleading. Because residential property is made up of two factors – the cost of the house/physical property and the cost of the land.
For example, if you buy a house in Belgravia for £15m, you will only insure it for c. £6m because that is the cost of rebuilding it in the event of a fire, etc. So, the majority of the value is in the land. Meanwhile, the houses I owned up north cost me £22k and £28k but I needed to insure them for £80k each.
In other words, the land had negative value! Just consider that for a moment.
It is the movement in the land price that will provide the majority of the gains rather than the physical property itself.
And understanding what causes this and how you can benefit from the increase in land price is essential to success. It is also why London will continue to outperform over the long term despite seemingly low yields. Growth stocks offer a low yield because they are growing. London offers a low yield for several reasons; the growth in global money supply being just one factor.
Please Note:
This does not mean that prime London property is a bullet proof investment. It is not, which is why I spend the majority of my time advising my clients not to buy property in London. You must remain selective and ensure you acquire a “best in breed” property.
And if you would like to discover how to find the best property your money can buy – irrespective of whether you wish to acquire a home or investment/buy to let property – and then negotiate the lowest price possible, you can request a complimentary copy of my book by clicking here, emailing [email protected] or calling 02034578855 (+442034578855 from outside the UK).
