The best way back into the property market

As the future looks brighter for bricks and mortar, where should you place your bets on a recovery?

Jennifer Hill

The British love affair with bricks and mortar is back as activity picks up and a growing number of analysts believe prices have bottomed out.

Research from Mintel has found that a third of adults believe now is a good time to invest in property and more than half believe property is a good long-term bet — despite the recent crash.

Nationwide building society said last week that the price of the average house rose for the third consecutive month in July, up 1.3% to £158,871. House prices are still 6.2% lower than 12 months ago but that is a sharp improvement on the 9.3% year-on-year decline reported in June.

Meanwhile, the Land Registry index, which is considered a more comprehensive measure than the Nationwide and Halifax indexes, rose in June for the first time since January 2008, albeit by only 0.1%.

In America, the Standard & Poor’s Case-Shiller index, which tracks house prices in 20 US metropolitan areas and is viewed as a general economic indicator, rose 0.5% in the three months to May — its first rise in 34 months of decline.

Activity is picking up, too. Mortgage approvals for British house purchases hit their highest level in more than a year in June, Bank of England data showed last week, while Skipton building society said a 23% rise in activity at Connells, its estate agent subsidiary, helped it notch up profits of £17m in the first half, after a £20.6m loss in the second half of last year.

David Cutter, the chief executive of Skipton, said: “Based on increasingly positive indicators, our house view is that the UK has reached the bottom in terms of house prices.”

Others are less bullish. Seema Shah at Capital Economics, said: “With unemployment rising and average earnings growth so weak, sales volumes will pick up only very slowly this year and next — and not by enough to put a floor under house prices.”

For those who want to get back in, though, there are a growing number of ways to do so. Here, we examine the options.

FUNDS

Aviva is the latest pension-fund manager to get into residential property by committing funds to the government’s “build to let” programme, following Legal & General and Schroders, as reported by Sunday Times Money in May.

It is planning a £1 billion fund for new-build residential property in partnership with CB Richard Ellis, the property consultant, and a big US residential manager. It will target low to middle-income renters. Despite the recent crash, UK house prices remain 64% higher than in 2001, while wages have risen only 26%.

Institutions have been attracted by the yields on residential property, now about 6% after recent falls, compared with 4% two years ago. However, retail investors will be able to get access only through their pension funds, as the investments are, at present, open only to institutional investors.

There are a growing number of others funds, though, that aim to tap into housing market turnaround. London Residential Opportunities, a new property group led by the former boss of housebuilder Redrow, wants to raise £50m from investors ahead of an autumn flotation on the London Stock Exchange. The fund will buy about 330 flats and homes on some 15 developments in London. It then plans to let the flats for up to five years before selling them in what it hopes will be a rapidly recovering house-price market in the capital.

The business is the latest in a string of potential floats this year, with Nick Leslau’s property opportunities venture, Max Property, being the first to list on AIM, the junior stock exchange, after raising £220m. Among listed property trusts, Mick Gilligan, at financial services firm Killik, likes AIM-listed Medic X, which holds a portfolio of properties let to doctors and hospitals, and ING Global Real Estate Securities.

BETTING

Cityodds.com last week launched the first platform to allow people to place fixed-odds bets on the direction of the Halifax house price index, The Sunday Times can reveal.

The binary betting service allows you to profit by calling the market correctly, while limiting potential losses. Binary betting lets you take a view on whether an event will happen — the pound will slide; the FTSE 100 will close up; or house prices will rally, for example.

Potential losses are fixed at the amount wagered and potential profit is fixed, too, based on the odds given when the bet is placed.

This contrasts with spread betting: here, profits and losses are open-ended, although a “stop-loss” can be placed on a trade — the level at which it will close to limit losses.

Mike Chadney, chief executive of Cityodds, said: “People can now bet, with limited risk, on the actual movement of house prices.”

Fixed-odds betters set their own parameters within which they think a certain market will close. Typically, odds are about 3:1. The tighter the range, the better the odds.

Suppose you think the Halifax UK All Houses index will stand at £159,000 to £160,000 when Halifax releases its July figures (against £158,641 in June). Cityodds was quoting a price of 7.6:1 on this range last week. If you placed a £10 bet and were correct, you would win £76, but if you were wrong you would lose your £10 stake.

To mark its launch, Cityodds is running a competition with a £10,000 prize for the person who makes the most out of £500,000 of virtual money from betting on house prices until next June. Participants can stake up to £10,000 on each trade. They do not have to hold their positions until June 2010.

With binary betting, a bet can be “sold” back to Cityodds if it looks like it is going against the punter — or if they want to take profits.

If house prices moved farther away from your range, the price that Cityodds will give you for your bet would drop — to, say, £2.50 on a £10 bet. If, however, it looks like you might win, but it’s not a certainty, you could sell a £10 bet for £15. This means you’ll still turn a profit, though not as much as if you had waited until the end of the trading period and were within the range you set.

BUY-TO-LET

Landlords have endured a tough time of late as the rental market became saturated with stock from “accidental” landlords — those who didn’t want to sell property in a falling market. This pushed rents lower but they have started to stabilise, according to findaproperty.com’s latest rental index.

Rents in June reached the highest level since March, at £825 a month as stock fell for the second consecutive month. Stock levels are down 1.7% since May but remain 68.4% higher than July last year.

Some landlords are adding to their portfolios as prospects improve. Almost a tenth of landlords have bought buy-to-lets so far this year, according to Paragon Mortgages, and 30% expect tenant demand to rise in the next year.

The average yield across landlords’ portfolios has risen to 6.4% in the second quarter from 6.2% in the first, Paragon said. The number of buy-to-let deals has plunged 96% from 4,690 to 177 in the past two years, said moneysupermarket.com, the comparison site. Buy-to-let rates have fallen 1.57 points, against 2.05 points for standard deals since October.

The lowest buy-to-let rate is a tracker from the Mortgage Works, owned by Nationwide, at 3.69%, but this has a 3.5% fee. A deposit of 40% and sufficient rental income to cover 125% of repayments is needed.

Coventry building society has a two-year tracker at 4.49% but the fee is fixed at £1,050. It requires a deposit of 50% and rental income cover of 125% of repayments.

On both deals, the sums “easily add up” — assuming you have a large enough deposit, said Clare Francis at Moneysupermarket.

Someone with a £200,000 property who wanted to borrow the maximum would need annual rental income of £5,535 to get the Mortgage Works deal and £5,613 with Coventry. On the average yield of 6.4%, a £200,000 property would give more than double that in rental income — at £12,800.

Propertyearth.net, which advertises chain-free property — such as repossessions and developers’ unsold stock — said the average yield on homes on the site was 2% higher than on the open market (6.59% compared with 4.56%), as its sellers look for a quick sale.

Auctions could also net a good deal. Essential Information Group said two repossessed flats in Birmingham and Sunderland recently sold for £52,000 and £50,000 respectively. They had sold in January 2007 for £119,500 and £170,000 — 56.5% and 70.6% more.

PROPERTY SHARES

Investment banks last week turned more positive on property-related shares — another way to tap into the market.

Credit Suisse upgraded Paragon, raising its target price to 110p from 70p. The stock closed on Friday at 104p. Analysts said its recent interim management statement showed loans in arrears of more than three months had fallen and saw income ahead of expectations.

Panmure upgraded rightmove.co.uk, the property website, increasing its target price to 450P from 400P. It closed last week at 420¼P.

Panmure pointed to “positive” housing market data and a share price valuation that was “undemanding given [its] growth profile”.

Killik likes housebuilders Persimmon and Bovis Homes, while Brewin Dolphin tips Hammerson. “It has made some good recent disposals, giving it extra firepower for future bargains,” it said.

BINARY BETS

Binary betting allows you to take a view on whether an event will happen, for example house prices rallying to between a certain range.

Suppose you think the Halifax UK All Houses index will stand at £159,000 to £160,000 when Halifax releases its July figures (compared with £158,641 in June).

Cityodds last week gave odds at 7.6:1 on this range. The narrower your range, the greater the odds. If you placed a £10 bet and were correct when Halifax released its figures, you would win £76. If you were wrong, you would lose £10.

While the bet is still open you can sell it back, although the price will depend on the odds at the time. (Jennifer Hill, The Sunday Times) http://www.timesonline.co.uk/tol/money/property_and_mortgages/article6735411.ece

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