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.

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