It’s been a bumpy few months in the property world. With this uncertainty, big investments have been put on hold. Few investors want to risk moving large amounts of capital with the fundamentals of the market still unclear. All it takes at the moment is a whiff of positive vaccine news to send stocks soaring and any grim words from the chancellor sends them plummeting again. Choppy waters for sure.
When one takes a closer look at the property market it’s generally feeling downward pressure. The uncertainty has seen London landlords accepting reduced rents for some prime central properties. The property market had been buoyant as we kicked off 2020, with Brexit ‘done’ prices were starting to rise at record rates. Not surprising then that offers of 5-10% below asking price are currently commonplace, certainly in the London boroughs. We are talking the odd million here and there discounted for top-end properties.
This depression of the market has the potential to create a perfect storm in terms of property investment. Knowing where you can maximise your yields is going to be more important than ever. This is why we’ve brought out the 2nd edition of The D’Rews London Short-Let Property Playbook. It covers the latest property investment data from all 33 London Boroughs. There were certainly some surprises when it came to the best potential yields for short & long lets. The pandemic has certainly changed the investment sweet spots for the UK’s capital city.
As a prospective London property investor, you are standing at the gate of opportunity.
The ‘new normal’ is a phrase on people’s lips at the moment, but this is unlikely to be the case for residential property prices & rents in the medium term (commercial property is another matter). They are likely to recover later in the year or early the next, making this a great time to take advantage of the downward price pressure.
One really must look past the current adverse conditions. The UK recently came 2nd to Singapore in this CEO World magazine report. Whilst this is not necessarily specific to property, it covers all the elements a property investor considers. From economic stability to freedom, from taxes to investor protection etc etc. What is good for business is generally good for property and London is at the heart of the UK’s economy.
As a prospective London property investor, you are standing at the gate of opportunity. Not to belittle the magnitude of the COVID-19 pandemic, as it is a tragedy for millions across the globe, but the world cannot stop turning and opportunities cannot be turned down. One also cannot ignore the bigger economic picture.
A large increase in unemployment (9% is forecast by the BoE), is on the horizon. This is something which is being delayed rather than avoided through the UK’s furlough & unsecured loan schemes. Such an increase in unemployment leads to an unavoidable rise in repossessions. This will have a direct negative effect on property prices across the country. It is hard to say how many citizens will lose their jobs once the protective cloak of the government’s schemes are removed. It is inter-dependent on how well the economy recovers, but there are bound to be more corporate closures as 2020 progresses.
In March, the Bank of England set their base interest rate to 0.1% with a prospect of negative rates; this is uncharted territory. This was an effective tool in stimulating economic activity after the 2008 crash. However, the COVID-19 crash is a whole bigger beast as it encompasses every aspect of modern life, not just the banking system. There are doubts that it can work, or at least be as effective again this time.
The Chancellor of the Exchequer tells us to brace for the ‘biggest recession in recent times’. As he’s the nexus for a whole host of statisticians and experts, he is unlikely to be far wide of the mark.
So, for a serious property investor the time to invest couldn’t be better. Your mortgage rates are likely to be the best in British history, as they are pegged to the Bank of England’s rates.
The bad good news
So, how far down is the market likely to go? Well, that depends upon who you ask. The Centre for Economics and Business Research predicts that prices will be down by 13% “as a lack of transactions, high uncertainty and falling incomes take their toll”. Whereas a third of valuation surveyors are more optimistic in predicting a drop of 4% or less. Lloyds claimed an extreme 30% could be possible. All terrible in varying degrees for the sellers who could shortly be facing negative equity.
So, how does this impact a would-be property investor? Buy-to-short-let and let rental income rates are likely to stay around the same level, meaning yields are likely to be larger. For the canny investor this has the potential to be a golden opportunity for investing in property.
But when is the best time?
The majority of financial analysts believe there will be a U-shaped recovery. The bottom of this curve is likely to be throughout Q3 as the economy tries to get back on track in a staggered manner. Q4 should see a rapid improvement in outlook.
This isn’t the only eventuality being mooted, there’s an L shaped ‘recovery’ where the country struggles to get back on its feet over a far longer period or a W, where the recovery is interrupted by a relapse.
It is inadvisable to wait for the ‘bottom’ of the market. The wheels of property transactions turn slowly. So, if you do manage to buy at the bottom, it is going to be a case of luck rather than judgement. As you can see there are many theories on the shape of the recovery, so don’t leave it to chance. Act as soon as possible.
London is a place well positioned to bounce back. It was the location which bore the initial brunt of the virus in the UK, but now has its lowest transmission rate in the country.
The best time to strike is a personal decision. When you are happy that you have the property you want and are happy the price has improved your yield significantly. Just don’t wait too long as the price is not the only factor to consider. The seller may change their mind should the price drop become too precipitous.
Short let Rental market near future prospects
As mentioned earlier, the downward pressure on the property market should increase yields as the nightly/monthly rates bounce back. The caveat to that statement is the current uncertainty surrounding travel and quarantine policies around the globe. This ensures that near future reservations and therefore yields are going to take a hit. Certainly, for short-lets. More and more short-let properties are being repurposed for long lets or the ‘short-lets’ become informal medium lets.
An upside for the investor here is that there will be fewer short-let properties on the market. AirDNA, the website that tracks short-lets throughout the capital, had 85,000 registered active short-let rentals at the end of 2019. This has fallen by 28% to 62,000 for the first quarter 2020.
This tailing-off of the market may see more distressed sellers appearing. It is certainly seeing a reduction in the number of active short-lets. The economic downturn has hit many businesses that took on large mortgage debt for multiple properties, banking on the large profit margins.
There is of course always the option to take a 6-month AST now, this too will be at a lower price due to flooding of the market with ex-short-let properties. This will mean your property will be available for the premium short-let season of Christmas & New Year.
At Michael D’Rews we can advise and facilitate both forms of rental.
This flexibility will enable you to ride out the storm relatively unscathed.
AFFECT ON LONDON PROPERTY INVESTMENT AREAS
We published the first edition of The D’Rews London Short-Let Property Playbook in the first quarter of 2020 and as you can imagine the figures have been transformed by the pandemic. Yield potential was down pretty much across the board.
There were changes in our top 3 due to falling house prices and steady rental incomes. Within in some of the Boroughs we saw that places like Bermondsey & Hoxton improve their potential. This was due to a stronger demand from the wealthier areas in this time of economic hardship.
Chingford in the rural part of Waltham Forest also moved up the investment chart with demand away from more densely populated urban areas rising.
So to recap, the current economic conditions provide a great opportunity for investors looking to come into the market and snap up some reduced-price properties. In London it feels a little like a duel between buyers and sellers as to who will crack first. There are certainly venture capital firms with liquid assets ready to swoop on this unprecedented property market.
At Michael D’Rews we offer the London property investor an invaluable playbook covering all 33 boroughs across the city. This will give you property short and long let yields, plus a deeper insight into the London market. In addition to this, once you have your target, we can offer an in-depth analysis on what you can expect for your capital.
As an investor the coming months are prime time and we at Michael D’Rews will be with you every step of the way.