Time for a new investment strategy

Posted by Vesta Property on 19th December 2019 -

Last week we discussed the various factors impacting the property market. 

This week we have a new government with a mandate and a very clear majority. There is now clarity in the haze that is Brexit – well at least we now know which path we are headed, and the foundations are starting to be set. So we can be very hopeful that the political pageantry of the last three years and the resulting stagnation will at last be over.

The markets have reacted well to Boris’ extraordinary win and/or Corbyn’s catastrophic defeat. Pound sterling is up, the stockmarket is on the up and there seems to be a renewed confidence. However, commentators are cautioning that a likely economic bounce might only last until the summer if insufficient progress is made on the terms of a trade deal with the EU ahead of next December’s deadline.

So, what might this mean for your property investment strategy? 

Some might argue that if you have not been active and buying over the last 12 months you might already have missed the boat! It has been a buyers’ market and for those vendors that needed to sell it was not really a question of whether you would get your asking price but rather what discount you would accept. For investment properties (i.e. those with tenants in place) Vesta has generally achieved very close to asking price with most deals being agreed within single figure discounts, which is similar to the wider owner-occupier market. Because vendors who use Vesta can continue to earn rental income throughout the marketing and sales process (which was recently estimated to take around 6 months on average), sellers aren’t in a forced situation to sell at a significant discount. At the same time, the buyer knows exactly what they will earn from day one and already has a tenant in place so they do not need to fund additional lettings fees for finding new tenants, nor refurbishment fees to make the property attractive for incoming tenants.

The improvement in sterling will do little to dampen the international buyers who will once again be attracted to the UK and in particular the better known investment cities like London, Manchester, Liverpool, Oxford and Cambridge, simply because they know the UK is a sound and safe investment once again. There may even be an international rush to invest in the UK in light of an appreciating pound sterling and a potential increase in stamp duty for overseas buyers.

Expert opinions

What is very clear is that there is a crisis looming in the private rental sector as new figures from the Residential Market Survey by the Royal Institution for Chartered Surveyors (RICS) for November show a sharp drop in supply over the last year. With tenant demand continuing to increase, RICS have already indicated that they expect to see rents going up by around 3% per annum over the next five years.

David Smith, policy director for the Residential Landlords Association said:

“If the decline in the supply of new homes to rent continues to fall whilst demand is still rising, this is going to lead to a crisis in some areas as tenants desperately search for somewhere to live.”

Savills, in their Annual Residential Property Forecasts Report, are forecasting that:

“…the average price of a UK home will rise by 15% over five years, with a Brexit-bounce only gaining a real foothold at the end of the transition period”.

In summary

• Demand for rental property is predicted to increase
• Rental income is also predicted to rise  
• Property prices predicted to increase, particularly in 12 months’ time

We are yet to fully understand how the new Conservative Government will address the property market, however, the expectation is that they will be generally more favourable. A sensible policy that aims to boost the supply of new homes will also have to give serious consideration to supporting landlords and investors, which are a significant source of private capital and provide a significant channel for home builders and developers selling their stock, without which lofty construction targets are unlikely to be delivered.

With all of the above in play, it feels like a good time to start (re)considering property – as we have said previously – housing will always be a major issue for any government and real estate still has great investment characteristics compared with other investment types.