Investing in UK Residential Property
UK INVESTMENT
London ’ s
Next Big Challenge
Investing in UK Residential Property
BY JAMES GLEW
The benefits of investing in a residential property in the UK are often considered to be intuitive covering aspects such as providing a hedge against potential future devaluation of the rand , having security through investing in a stable well-regulated economy and choosing property as an asset class because the investment is underpinned by bricks and mortar . London is also considered to have further benefits relating to it having high tenant demand and proven resilience over time .
Through choosing a property in a location with high rental demand , this variable will be taken care of . As long as the property is continually rented there will be sufficient cash flow to cover management and maintenance costs , and mortgage interest payments . With mortgage loans often having flexibility regarding repayment of the principal , there is a further cash flow buffer in place to deal with possible increases in interest rates . Based on this , an investment property should be self-sufficient in terms of its cash flow requirements .
According to the recent monthly Halifax House Price Index , the house prices in the UK for the three months to April 2016 were 9.2 % higher than the same three months a year earlier . The trend for the past year is shown on the graph below and is confirmed by the Nationwide survey . A further comparison is from the UK land registry which shows a residential price index for greater London of 100 in January 1995 trending to 580 in March 2016 which reflects an historical trend over the past 20 years of over 8.5 % pa compounded .
The current market conditions remain very tight as the severe imbalance between supply and demand persists . This situation , combined with low interest
rates and rising employment and real earnings , should continue to push house prices up over the coming months . According to the latest quarterly Halifax Housing Market Confidence Tracker , while there is some uncertainty about the wider UK economy , 65 % still believe that average UK property prices will be higher in 12 months time .
Housing activity was particularly strong in the first quarter , strongly influenced by the desire to avoid the increased stamp duty targeted at buy-to-let investors , coupled with the availability of mortgages .
While there is expected to be a cooling in the coming months as a result of the uncertainty around Brexit and the increases in stamp duties , the tight supply of accommodation relative to demand , particularly in London , is expected to result in continued house price growth .
If one uses a 4.5 % annualized property appreciation assumption ie around half of the current and historical trend , and assume that a property is profitable and self-funding from a cash flow and operational perspective , the return on investment purely from property appreciation would be in the region of 8 % pa based on 50 % gearing . If there is an operational profit , which is typically the case , the return will be even better .
While returns on a property investment cannot be guaranteed , there is a clear case for investing in a buyto-let property that is self-funding with high benefit potential from property appreciation .
RESOURCES
Inventure Property
56 JUNE 2016 SA Real Estate Investor www . reimag . co . za