What is the best type of property for investment?
This is one of the questions I am asked most frequently. Quite often the person asking will then add:
Should I buy a house or apartment?
Which areas will outperform?
What size properties perform the best?
These are all good questions but slightly miss the point. Firstly you need to decide what you are trying to achieve. Is it a high yield or will you want capital growth? How quickly will you want to liquidate? The investment goal has to be very clear otherwise you will likely buy a property that is a compromise and will not be the best investment for your purposes.
Having said this, there is one very simple rule. If you buy a property at a good price it is likely to outperform a property for which you overpay.
This may sound like rather crass advice, but I am writing this just as Alibaba has floated on the US stockmarket. It has just risen 32% on the first day of trading, so it is clear that either the bankers advising on the IPO have seriously undervalued the company (as has the owner) or unsuspecting investors (i.e. the public who are unwitting speculators) are paying too much because they have bought into the story rather than the fundamentals.
Real estate’s version of the IPO is the off-plan sales market. New developments are sold before a bulldozer has moved into place and in the past it has been a very easy way to make spectacular gains. Investors agree to buy a property for £1m and exchange contracts before the beginning of or early in the construction of the building.
The plan is to either hold onto the property to rent it out or to sell soon after completion at a big profit. However, the real speculators exchange contracts but have no intention of buying the property at completion. They hope to assign their contract to another buyer so that they never have to pay money on completion and avoid stamp duty while making significant profits.
A quick example:
The apartment is bought at £1m
10% deposit is paid at exchange of contracts (£100k)
Assuming the market/demand for the development has risen – sell the property for £1.3m before completion (i.e. assign the contract)
The speculator realises a profit of £300k on £100k. Rinse and repeat on the next development.
In some instances the speculators have no means of paying on completion. Effectively they are buying an option on the apartment just as you would on an equity or commodity. If they cannot assign the contract or find the money for completion, they will be forced to forfeit their deposit.
So are new builds much more attractive investments than more traditional properties?
The scenario mentioned above works very well in a rising market. However, it is a risky business. In my view it is even more risky at the moment due to two overriding factors:
- In certain areas there is an oversupply of new developments
- Prices at many of these developments are hardly at the bargain counter
Politicians bang on about how disgraceful it is that developers are selling the apartments to international buyers – predominantly in Asia and the Middle East- rather than in the U.K. This is political hogwash. There are very good reasons for the developers spending a fortune on sales’ tours abroad rather than the much cheaper option of selling in the U.K.
– Few British buyers can afford these developments
– Few British buyers are comfortable buying off-plan
– International buyers will pay higher prices – mainly because they have no idea what they are doing!
This last point is perhaps the most important. These developments would never be built without the international money. The banks simply will not lend to the developers unless there have been significant off-plan sales.
The developers quite rightly have spotted a market where there is huge demand and are selling the properties for as high a price as possible. This is where the new-build speculation has become more dangerous; there is far less margin for the speculators than there used to be in my opinion. Consequently, I expect a number of these investors will find out that they have paid too much and will find that it will be very difficult to sell these properties at a profit on completion.
I should point out that this is not true of every new development. However, I am very wary of areas where there is an extremely high density of new building taking place and where there will be a preponderance of similar apartments. There will be an oversupply for both rent and sale when the developments have finished. Unfortunately the projected gross yields are ambitious (to be polite) and once service charges, agents’ fees, etc. are factored in then the net yield will not cover the mortgage costs (assuming there is a mortgage).
Indeed there will be a distinct shortage of tenants able to pay the rents projected. Therefore rents will be lower as there will be an oversupply of property while void periods will increase, exacerbating the compressed yields.
Of course, many investors will be unaffected by this as they are cash buyers and are taking a long term view. However, I expect in many cases you would be better advised to wait until some of the developments have been completed before you look to buy as there are likely to be a number of forced sellers.
So are traditional London properties the best investment then?
There are plenty of idiotically priced properties on the market, so buying a new build apartment at the right price could well be a better investment. For instance, I have just acquired an apartment in a stucco-fronted building that was originally on the market for £2.7m. We have just bought it for under £2m.
I would love to give you a shortcut to buying the ideal investment property but it is just never that simple.
It is essential that you define your investment goal and then research your target market, so that you become an expert and can make an informed decision. If you rely on glossy brochures and projections made by the developers or estate agents then you are likely to buy a sub-optimal investment
No-one can know what the future holds and there are no guarantees. However, doing your homework and buying at a discount to fair value now will give you a much higher probability of your investment outperforming in the future – irrespective of whether it is a new build apartment or a traditional London home.
Obviously this article is a brief overview of a vast topic. If you would like to receive more information simply email firstname.lastname@example.org