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It's a good time to buy but be very selective

16/01/2010

However, courage is not a necessary prerequisite for taking the plunge into property, not even at this highly uncertain time; what it requires, rather, is a good measure of common sense.

If there is one piece of compensation to the property price slump, it is that the sector has at least rid itself of the ‘herd’. The fault with these amateur investors did not lie with their entry into property per se but their conviction that almost any piece of stone and mortar would do. They failed to appreciate that property was a ‘broad church’ investment and that money had to be targeted. Instead they acted like those novice buyers of stocks and shares in a bull market who throw cash at any quoted company just because the share price index as a whole is rocketing skywards.

Thankfully, private individuals considering property investment – and their numbers in 2010 will be relatively few – will carefully pick and choose what opportunities become available, a strategy that seems perfectly sensible. Six months ago I might have predicted that the market would begin a prolonged recovery in 2010; now I would revise that to 2011 if indeed it will happen in 2011 at all.

But, I hear you say, surely there will be assets with an underlying value that can be picked up cheaply in the next 12 months?

Yes, there is no shortage of repossessed properties at below-market prices but the very reason for there being in the hands of lenders was because of their dubious merits as investments in the first place, due mainly to a combination of wrong location and an oversupplied market. Once the recovery does begin, today’s ‘bargain’ properties are likely to have the slowest levels of capital growth – although they may appeal to someone prepared to sit tight for a decade and be content with rental income.

Prices across the board have dropped considerably from their peak, which was roughly the autumn of 2007, but landlords in proven locations have been cushioned by a sustained period of regular rental income; unless faced with a giant tax bill or some other unexpectedly large financial commitment, few of them will have any immediate need to sell and will wait for values to recover before even thinking about doing so.

Meanwhile, even if unemployment stops rising, increasing levels of personal taxation will dampen recovery in the market. It is widely believed that Alistair Darling’s recent pre-Budget report did not reveal the true extent of the burden facing the taxpayer a couple of years from now – whoever wins the next Election.

Even so, there are still a number of good reasons to get into property, providing one gets the location right because, without this, any investor will struggle from day one. For this reason I see a reasonable level of demand for ‘traded’ investments – i.e. rental properties already tenanted and with a good record of regular rental income. We are experiencing a gradual increase in approaches from folks with cash savings who see this type of property as providing them with an annual net return of 1 or 2 per cent above what they can obtain on deposit.

This type of buyer might put down half the cost of a property in cash and borrow the remainder, which should give even the most cautious bank or building society a sound equity ‘safety net’.

However, while the borrower should be able to look forward to a fairly prolonged period of low interest rates, once the recovery does start, rates are almost certain to rise to counter the threat of inflation. Therefore, potential investors should clearly not base ‘affordability’ on today’s base rate. Any common sense property investment plan partly involving borrowed money will ‘build in’ a rise in interest charges at somewhere down the line.

David Alexander is proprietor of the Edinburgh- and Glasgow-based estate and letting agency, D J Alexander.

THE SCOTSMAN, 16 January, 2010

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