D.J. Alexander - Estate Agents & Property Managers

Why there are still good reasons to invest in residential property

01/07/2009

The sale of buy to let mortgages has almost come to a halt, the number of households in negative equity seems to grow daily and many analysts have predicted that the fall in values has still to bottom out.

So why would anyone want to invest in residential property at the moment?

For a simple answer, take a look at the “safe” products advertised in the financial pages of our daily and Sunday newspapers.

Banks and building societies are paying interest of as little as 0.5 per cent per annum – yes, per annum – on some accounts and anyone seeking a return of much more than 2 per cent may have to agree to any number of penalty charges for early or partial withdrawal of funds. Bonds offer more attractive inflation-busting rates but to benefit, the investor has to put his or her money away for at least two years. Meanwhile those indulging in riskier, stock market-based investment plans may have to say “cheerio” to their savings for the next five to six years if they want a high-yielding return (which in any event may not be guaranteed).

On the face of it, property may appear to some to be an even worse option. Anyone buying a residential investment at the moment is likely to see its value go down further before it goes up and, albeit depending largely on where the property is located, there is no absolute guarantee of securing income from a tenant.

Tenanted properties in locations proven to be popular with tenants are another matter, however. D J Alexander always has a list of yield-producing properties for sale and the current ones are providing returns of up to 6.54 per cent for their current owners – and this is a net return, after management fees and other running costs (but not taxation) are taken into account.

Consequently, these properties are now attracting the attention of people who would normally safely tuck substantial cash holdings in a bank because the returns from deposits are currently so low, a situation that is likely to persist for at least another year.

Ironically, it is the current return from rental income that is attracting these buyers, rather than the prospect of capital growth, which, during the 27 years this firm has been in business, has been the raison d’etre for residential property investment in the choice rental locations in Edinburgh, Glasgow, Aberdeen and a few provincial hot spots like Stirling or Perth.

But these present-day investors are opting for residential property with an open mind and a clear head. They are prepared for the possibility that, three months from now, the “market value” of their properties may actually be less that they paid for them but, like me, they are confident that – unless the world turns completely upside down – values will recover in line with an improving economy and that, eventually, the mixture of capital growth and ongoing rental return will make their investment in stone and mortar pretty hard to beat.

My comments should not be taken as a recommendation to start investing in residential property at the present time. Like most other people, I have no idea how much further the market has to fall. A few months ago I took the view that we may see the first, hesitant signs of an upturn later this year but I now fear that this may not occur until some time into 2010.

There’s plenty of fertiliser being spread around but no sign yet of any green shoots, which means the market is far, far off bottoming out. In those 27 years of professional involvement in the property sector, I have never seen confidence at such a low ebb and with the negative effects of company and personal bankruptcies only now beginning to feed through to consumer spending, it may get lower still.

Worryingly, the local market most adversely affected in Scotland could be that of Edinburgh – traditionally the powerhouse of the growth in value of residential property – because of the size of redundancies, and potential redundancies, in the banking sector.

Therefore our list of investment properties, referred to earlier, is basically for people who are prepared to be patient, and even more importantly, who can afford to be patient.

But neither do I want to be over-pessimistic. Rob Trotter, our senior property manager in Edinburgh, tells me that the number of vacant properties on the books of our two offices in Dundas Street have slumped by almost half – from 250 to 130 – in just a few weeks. The total amount of lettings during May was 162 – just five short of the firm’s record for a single month, which was set almost two years ago, just before the onset of the credit crunch.

This is very welcome news for our landlord clients. “After almost a year of having to compromise on their rental charges to either win or retain tenants, landlords are now holding out for their quoting rents – and managing to achieve them,” Rob tells me.

Paradoxically, given the current economic climate, the feedback given to Rob by his letting representatives is that the demand is largely job-related.

He said: “Whatever the current woes in the financial market, both locally and nationally, there are still a number of high-end job openings in Edinburgh, of the type being created by Virgin Money and Tesco Personal Finance, who are both opening operations in the city. These and less high profile employment situations mean executives are being moved to the city, and this has increased the requirement for rented property. Even if their long-term intention is to buy, many people in these circumstances prefer to rent first to get a ‘feel’ for their new location.

“This has led to a sharp increase in demand to rent, almost across the board, but particularly for executive-type family homes, particularly with gardens, in prime locations – a market that has been dead for the last six months,”
says Rob.

However, not all of the demand is being created by new employment opportunities, as Rob also explained. “Some of those seeking rented accommodation people who had been based abroad but whose contracts have now ended or been terminated and they are looking relocate back home to Edinburgh. It might sound like a strange twist but the market is being driven by a combination of specialist job creation in the city, which is bringing new people in, and a possible downturn in employment overseas, which is causing locals to return.”

Meanwhile, the situation for landlords in the West is slightly less sanguine. Jacqueline McLelland, senior property manager at our Glasgow office, has told me: “High end stock in prime locations like the Park Circus area is moving well, nevertheless negotiation is the name of the game.”

Overall, however, this news bodes well for those landlords who have stuck with residential property as an investment. Despite the recession, all the lifestyle changes that require people to move house – e.g. marriage, children, divorce, death, redundancy, relocation – are still taking place. Mortgages are difficult to obtain, rental leases are not, hence the current level of demand for people wanting to take tenancies. Meanwhile, many existing tenants who, in normal circumstances would have moved on to owner-occupation, are renewing their leases because of the mortgage shortage.

DAVID ALEXANDER
Proprietor

1 JULY, 2009

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