Investing in UK Residential Property
UK INVESTMENT
London’ s
Next Big Challenge
Investing in UK Residential Property
BY JAMES GLEW
The benefits of investing in a residential property in the UK are often considered to be intuitive covering aspects such as providing a hedge against potential future devaluation of the rand, having security through investing in a stable well-regulated economy and choosing property as an asset class because the investment is underpinned by bricks and mortar. London is also considered to have further benefits relating to it having high tenant demand and proven resilience over time.
Through choosing a property in a location with high rental demand, this variable will be taken care of. As long as the property is continually rented there will be sufficient cash flow to cover management and maintenance costs, and mortgage interest payments. With mortgage loans often having flexibility regarding repayment of the principal, there is a further cash flow buffer in place to deal with possible increases in interest rates. Based on this, an investment property should be self-sufficient in terms of its cash flow requirements.
According to the recent monthly Halifax House Price Index, the house prices in the UK for the three months to April 2016 were 9.2 % higher than the same three months a year earlier. The trend for the past year is shown on the graph below and is confirmed by the Nationwide survey. A further comparison is from the UK land registry which shows a residential price index for greater London of 100 in January 1995 trending to 580 in March 2016 which reflects an historical trend over the past 20 years of over 8.5 % pa compounded.
The current market conditions remain very tight as the severe imbalance between supply and demand persists. This situation, combined with low interest
rates and rising employment and real earnings, should continue to push house prices up over the coming months. According to the latest quarterly Halifax Housing Market Confidence Tracker, while there is some uncertainty about the wider UK economy, 65 % still believe that average UK property prices will be higher in 12 months time.
Housing activity was particularly strong in the first quarter, strongly influenced by the desire to avoid the increased stamp duty targeted at buy-to-let investors, coupled with the availability of mortgages.
While there is expected to be a cooling in the coming months as a result of the uncertainty around Brexit and the increases in stamp duties, the tight supply of accommodation relative to demand, particularly in London, is expected to result in continued house price growth.
If one uses a 4.5 % annualized property appreciation assumption ie around half of the current and historical trend, and assume that a property is profitable and self-funding from a cash flow and operational perspective, the return on investment purely from property appreciation would be in the region of 8 % pa based on 50 % gearing. If there is an operational profit, which is typically the case, the return will be even better.
While returns on a property investment cannot be guaranteed, there is a clear case for investing in a buyto-let property that is self-funding with high benefit potential from property appreciation.
RESOURCES
Inventure Property
56 JUNE 2016 SA Real Estate Investor www. reimag. co. za