Why London is losing its lustre for property investors

Why London is losing its lustre for property investors

They’re leaving London in their droves – homeowners, renters, buy-to-let landlords and commercial property investors.

According to Savills, 93,300 of the capital’s residents left London in the year to June 2016 – over 80% more than five years previously. The principal reason seems to have been noticeably cheaper housing.

Renters are looking elsewhere too, with the Guardian noting that rents in London have increased by a third in the last decade, compared with 11% in the North West, 13% in the West Midlands and 18% in the South West.

Buy-to-let landlords scraping by on yields of around 3.5% look enviously at the 7% available in the Manchester area; even their own website, Landlord Today, suggests that “it could be time for landlords to turn their attention away from pricy London and look at the UK’s regional cities.”

Residential investors are playing a waiting game in the off-plan apartment sector, anticipating a further weakening of the market and an oversupply of high-end rental stock.

Commercially, Deloitte recently reported a 13-year high in London office construction, but disappointingly low letting levels of below 50%. Big players such as British Land are having to incentivise prospective tenants and have already cut back on development, while a RICS survey of agents suggests that office and retail rentals will soon be on the way down.

Where are they going instead?

The post-referendum sterling crash has been a great bonus for currencies linked to the dollar, and it has also meant a short-term retreat by the UK institutions which has opened up the market.

Britain’s transparent legal system and relatively simple ownership laws are also very appealing.

But London itself is still very expensive; property prices outside the capital can represent much better value yet still deliver attractive rental yields.

Last year, according to Savills, £5.8 billion of overseas money went into regional UK commercial property – 29% of all non-London investment, compared with 18% in 2014 and 27% in 2015.

£1.9 billion of this amount came from the Middle and Far East, 90% up on 2015. 32% was European money, almost half of which came from Germany.

The Savills report concluded: As investors continue to search for assets with strong covenants and yields over 6 per cent we certainly expect to see continued activity in the regional markets continue throughout the year.”

Opportunities for the private investor

Many private individuals ignore the commercial sector; indeed, some don’t even know that it’s open to them.

But anybody is free own a shop, an office or a restaurant.

Or better still, for a high-yielding yet totally passive income, there is now purpose built student accommodation and serviced apartments.

The best properties in these relatively new categories will deliver 8-12% NET annual income, and they will be contracted for a 10-year period.

If they’re new builds, they’ll come with a 10-year warranty; they will all be fully managed 24/7 by professional onsite teams.

To ensure an effortless income, these management teams will take full responsibility for every single operational aspect of the property. This includes all letting, rent collection, maintenance and repair.

And to ensure that it really is a NET income, there will be no further charges whatsoever during the 10-year fixed term – no ground rent, no service charges, no utilities, nothing.

They are the ultimate “buy it and forget it” investments, with scheduled payments automatically made into the account of your choice.

As commercial properties, they are not subject to Stamp Duty at purchase (up to £150,000) nor are they liable to Capital Gains Tax at resale.

Talking about resale, because the fixed income term is fully transferable to a new buyer, you can offer a very attractive yield whilst at the same time making as much as 40% capital growth

How can the yields be so high?

By going regional, and avoiding those cities which are close to oversupply.

In the case of student property, this means sidestepping Liverpool, London and Manchester and instead handpicking ambitious universities which are proven to be popular with students. These universities will have campus expansion plans firmly in place or under way combined with a chronic undersupply of dedicated student accommodation. This will ensure demand both today and way, way into the future.

For serviced apartments, the fastest-growing sector in UK hospitality, it makes sense to pick the most popular resorts in regions with consistently high visitor numbers both from abroad and domestically.

What should you be insisting on?

James Harrington, Business Development Manager at sector specialists Emerging Property has some tips for prospective investors: “A 10-year fixed income term is a must. Not only does it give you a much stronger hand to play when it comes to resale, it also means you won’t get any nasty surprise costs if your property needs a refurbishment in year 5. Nor should you settle for less than 8% NET – a lower figure for a shorter contracted period almost certainly means you’re paying an inflated purchase price to give the developer a hefty upfront profit.”

Because a lot of people are still unfamiliar with purpose built student accommodation and serviced apartments, he also advises newcomers to “speak to somebody who knows the market inside out. Don’t be bullied by any hard sell tactics, just have an informal chat with an expert. When they explain clearly and simply how it all works, the facts really should speak for themselves.”