Doing more with less

By Martin Skinner,

"Martin Skinner"

Following on from my bright side article, I’m pleased to be able to report that the positive mental attitude approach appears to be working out rather well.  Investors (including my own little family office) have bought no less than 13 auction/receivership properties through Inspired Asset Management in the last month alone – with more sure to follow them.  That’s more than we transacted in the whole of the previous 12 months!

Dynamic duo

Dynamic duo | Inspiring interns

To achieve this we’ve been considering and discarding 1,000′s of other opportunities – more than ever before.  As you might imagine, organising, viewing and thoroughly appraising this volume of residential property is very labour intensive.  Like many other post credit-crunch businesses, we have far less resources at our disposal having dramatically reduced overheads and staffing in the wake of the squeeze.  So I would like to say a big thank you to the unsung (and unpaid) heroes of the City and the West End.  We have benefitted hugely from a series of very smart, diligent and hard working interns, most notably Louis, Kunal, Agne and Akvile who will all no doubt go on to achieve great things.  The help they have given us has been priceless.  Thank you!!

Our Joint Venture partners at Urban Share have also attracted a number of new equity investors and are close to securing their senior debt facility, so we’re clearly not the only ones making headway despite the choppy economic conditions.  Rather than blind optimism these developments are undoubtedly the result of the plain hard work and persistence that fuel most growing businesses these days; and a smile always helps.

On the macro-economic front there has been quite a lot of good news recently with employment up by 143,000 during the traditionally difficult Dec-Feb period and unemployment down by 17,000; the trade deficit reduced from £5.7bn in Dec to £2.4bn in Feb; and GDP growth again establishing itself despite the spending cuts. 0.5% growth has been initially reported for the first quarter and this is likely to be revised up, while 1.8% growth has been recorded for 2010/2011 as a whole despite an estimated 1.5% GDP fiscal tightening.

However, real incomes (i.e. after the effects of inflation) are still falling, retail spending is down and growth is likely to remain muted as public spending cuts take effect and the private sector continues to hoard its profits.  In general this should be good news as the government gets out the way and the economy rebalances from debt fuelled consumer spending and imports towards business investment and exports.

I believe this shows we are getting off our backsides and doing more with less.  The next couple of years are likely to remain tough as lower real incomes mean we feel poorer. But with this trend forecast to reverse in 2013/2014 and house prices, at least in London, expected to push beyond their previous peak, we will in due course start to feel wealthier again.

Meanwhile the North/South house price divide is continuing to widen dramatically as I and other Southerners forecast back in late 2009London is clearly driving this local growth on the back of global interest in our relative advantages, not least our discounted exchange rate and stable legal and political systems.  For example Galliard reportedly sold 80% of its new flats in the Strand for between £1,500 – 2,000 psf in just 8 weeks, with 90% going to overseas, typically Asian, investors.  Interestingly, the IPD’s recent annual results also highlighted the fact that Inner London (where we focus our activities) has outperformed all other areas on a total return basis over the last 10 years, including Prime Central London.  This is because Inner London yields are much higher than those in Prime Central London, while capital growth is only marginally lower.  And if you like London you’ll really like Jim O’Neill’s (Chairman of Goldman Sachs Asset Management) recent article entitled Brics herald a golden age for London.

IPD residential regional performance 10 year

IPD residential regional performance 10 year

George Osborne’s decision in the budget to finally link stamp duty land tax (SDLT) on bulk purchases to the average unit price, instead of the total transaction price, could actually make a real difference and eventually lead to a wholesale market developing.  And a barely reported amendment to housing benefits will mean more than 80,000 extra people need to rent rooms just as the unintended consequences of the House in Multiple Occupation (HMO) Licensing regulations start to bite and their supply is cut off.  We already expected rental growth in the young professional market to outstrip the rest of the market and issues like this will simply serve to push rents up further.

In conclusion it is my firm belief that investors should be planning their routes into the London residential property market right now, while the supply and demand imbalance is most acute, before the recovery becomes too established and opportunities for super profits dry up. Institutional investors may also start dipping their toes in the market, but are sure to lag behind the more entrepreneurial and often underestimated buy-to-let and private equity brigades.  So there’s still time for us to thrive.

Fall in GDP can spell a growth in opportunities

By Martin Skinner,

Martin Skinner
Martin Skinner

At home in the Skinner household Jack is growing up fast and the focus is now on education.  Magdalena is teaching him English, Polish, Chinese, swimming, walking, and maths. And I’ve been chipping in with football, video games, iPhones and blowing raspberries.  Is this a good modern example of division of [parental] labour?

Jack Skinner onwards and upwards
Jack Skinner onwards and upwards

Speaking of education, Mark Weedon at the IPD has been teaching the property industry one of its best kept secrets.  Despite residential property appearing to produce a lower net rental yield compared to commercial property, it has actually been on par over the last nine years when commercial value depreciation is taken into account.

“These findings indicate that relative residential income return is significantly devalued by its superior capital growth. In fact, residential property can deliver as much net income receivable as a percentage of original outlay to commercial for an equivalent sum invested in both. Therefore, the residential sector is now able to boast that it not only offers superior total returns but also that the cash returns from rental income can match commercial even if the percentage yield and income return remain noticeably lower” (2010, Mark Weedon, Head of UK Residential Services, IPD)

9 year income performance residential vs commercial
9 year income performance residential vs commercial

This means that, despite the rhetoric, UK residential property not only outperforms commercial property (and all major asset classes) on capital growth, but it also matches commercial for income return too.  The arguments from institutional investors against investing in this £6 trillion asset class are steadily being whittled away.

You can find the full International Property Databank (IPD) presentation here and their biannual research reports are available here.

Additionally, why not take a look at some recent Jones Lang LaSalle research forecasting house price inflation rising back towards its long term trend of above 7%p.a.  It makes an interesting read. Nationwide estimate that house prices rise by 2.9%pa in real terms, whereas researchers broadly agree that commercial property depreciates by around 1.5%pa in real terms.  This reflects the fact that commercial properties typically become obsolete and require replacement much faster that residential.

JLL UK residential property price increase forecast
JLL residential price increase forecast

So no wonder UK residential has historically provided a hedge against rising inflation, rising in value by 274% in real terms over the last 50 years compared to a 55% drop in commercial values.  Those interested in comparing the overall returns from residential with other asset classes should have a look at Tim Watts’ article from last year.

On the ground I’ve also noticed the effects of the ongoing supply shortage during the traditional moving season of November and January. Demand for vacant rooms and flats in our own buy-to-let houses in London’s Docklands was so enormous that we pushed rents up considerably and got them straight away, on top of substantial advance rents from Chinese students.  Yep, we should have asked for more…

Our vacancy rate is 0% and Inspired Asset Management’s partner Urban Share has also enjoyed near 100% occupancy for most of 2010, even after increasing rents by between 10-40%!  According to Knight Frank, residential rents in London have risen by an average of 16% over the last year.  They offer very rewarding and attractive returns for equity rich investors increasingly – and rightly – concerned about rising inflation.

Spareroom.co.uk (the UK’s leading website for finding and letting rooms) told me that they are now placing more adverts for rooms wanted than rooms available for the first time since they began in 1999.  That’s really quite remarkable when you think about it.

With no significant improvements in the debt funding environment or in local authority demands for affordable housing, supply will continue to fall short. At the same time, babies continue to be ‘born every day’ and more and more migrants are moving to London, whether from southern Europe or northern England.  I think I’m safe in making a new year’s forecast that London and the south-east will experience substantial increases in real residential rents over the next 5 years.  And that’s great news for current and future landlords.

Even the recent shock drop in UK GDP could prove to be good news for investors in London residential property – assuming that the recovery resumes relatively swiftly.  The shock has without a doubt pushed back future interest rate rises, while a weaker Sterling will continue to attract cash rich foreign investors.  There should also be some more exciting property deals available to experienced parties that are prepared to look and work hard enough.  Here endeth the lesson.

Sophisticated investors interested in deploying capital into London residential should contact me on 07968 790 611 to discuss the ways in which my partners and I can help you to enhance your returns.

Actions speak louder than words

Just back from a Standard Life Investments property seminar.

They’re pushing their commercial property funds despite awful performance, oversupply/falling rents and not investing in residential despite massive under supply and the [genuinely excellent] speaker himself being outbid recently on three houses. 

The explanation for buying commercial was that rental inflation was likely to turn positive in 2011 when supply dried up.  This despite the in-house view being that rents still had a long way to fall, their example (in the City) being:

 - £67.5 psf in Q4 07
 - £45psf currently (33.3% decline)
 - £32.3psf (28.5% further to go)

This is without factoring in yield expansion, tenant default risk and the massive rent-free periods (the speculation is that Nomura got 4 years for free on their recent transaction in the city).  Interestingly London’s rents have dropped first while rents in regional cities are expected to collapse very soon.  It always surprises me how predictable the ripple effect from London is both on the way down and the way up – markets tend to price these things in once they’ve learned them but this particular characteristic (which influences the Location, Location, Location saying) endures countless cycles.

Actions speak louder than words methinks & all actions/evidence says London residential to me. 

It never ceases to amaze me how institutional investors can be so focused on ‘traditional’ investments (IMO this can be freely translated to ‘hassle-free management’) to the point where they completely ignore one of the largest and most profitable investment sectors in the UK.

Any IFA intermediaries interested in property can contact me if they would like to know about available residential property funds – for example the Urban Share student fund is ready to take advantage of forecast continued growth in student accommodation rents and massive supply/demand imbalance that existed before the credit crunch and has been compounded by it.

Urban Share 2

The new £10m London Residential Investment Fund, Urban Share 2,we’ve been working on is now ready to be marketed.  It’s a very conservative 7 year fund with an LTV of 50% and an expected IRR of 10%+ (approx 100% cash on cash return over the life of the fund).  It will be buying below market value properties that generate high yields in London Zone 2.  Properties will be let to students and young professionals.  It will pay an annual distribution of between 2 & 5% and investors can access it through their Financial Advisors.

Follow

Get every new post delivered to your Inbox.