Newsletter

PROPERTY TRENDS ISSUE 5

EDITORIAL

Welcome to the fifth issue of Property Trends the monthly bulletin that focuses on property trends for residential property investors, landlords and tenants.

I have been listening!

We all live such busy lives these days and time is a challenge for all of us. I have heard a few voices asking for a shorter, quicker to read bulletin.

I entirely agree with those voices. There is a place for a longer bulletin but for the current readership something short but still powerful and informative is what is desirable now.

Not only will the bulletin be shorter, it will aim to cover more trends going forward. What may be reduced in terms of depth of coverage will be generously replaced by breadth of coverage.

This month we look at:

  • Serviced apartments – fad or here to stay?
  • The future for falling London house prices
  • The dangers lurking behind longer tenancies for tenants in the private rental sector.

Editor

ARE SERVICED APARTMENTS A FAD ?

Are serviced apartments a form of investment here to stay?

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For landlords who are not the regular common and garden type, serviced apartments have been big news for a few years now.

What are serviced apartments?

“Serviced apartments” is really just a fancy term for what we used to call bed and breakfast – but usually without the breakfast.

The re-branding has been brilliant and occupiers typically pay a good rent in the knowledge that they will be staying at a modern, often new or newly refurbished apartment and not some old-fashioned, dated, throw-back to the last century.

The term covers anything from long term hotel style accommodation to holiday lets, as well as traditional bed and breakfast style lettings.

A characteristic feature is a relatively short rental period with usually several occupiers over a year.

Many landlords seem to be making good money renting to people who have to work away from home – such as builders, contractors and project managers.

The benefits of serviced apartments

There seems little doubt that serviced apartments have risen in popularity on account of serviced apartments landlords owning property in their own name being able to deduct mortgage interest when calculating their profit – unlike the case with regular buy to let landlords.

Usually landlords are able to charge a premium rent, better than long term rental rates but not so high as to make occupiers look at hotel accommodation.

The rental returns are normally attractive, making up for the fact that such units can be unoccupied between lettings.

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The risks with serviced apartments

Renting out serviced apartments, like all property strategies, is not without risks.

A property may make a loss on account of longer than expected un-let periods.

The higher level of management in preparing a property for each new occupier may prove more difficult or expensive than anticipated, with adverse financial consequences.

Occupiers could cause problems or damage leading to financial losses.

Is the demand for serviced apartments likely to continue?

Demand for serviced accommodation is good at the moment – a period when the job market is strong. However, will that continue to be the case in the event of a serious economic downturn?

The economic indicators are that the next move for the economy is downwards.

There is also the risk that the government could target serviced apartments, imposing more stringent regulations and even changing the method of taxation for the worse.

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Is it a property strategy for you?

There is every indication that there will be strong demand for serviced apartments going forward.

Economic downturn may reduce demand but people will always need short term accommodation with greater flexibility and at lower rates than hotel accommodation.

Anyone looking to get into serviced apartments would be well advised to seek hands-on advice and assistance from someone who has successfully mastered the strategy in practice.

It is a strategy likely to be more expensive and time consuming to set up than mainstream buy-to-let. Top quality accommodation, along with a high level of customer service, are typically essential for success.

It is a good strategy to grow income in the short term, but long-term capital growth will be determined to an extent by the continued popularity of the strategy.

What do you think the future holds for serviced apartments? Your views may interest many of our readers. Please leave your comments below at the foot of this page.

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THE END FOR HIGH LONDON HOUSE PRICES?

Are the days of London’s dominance of the property market well and truly over?

london-3253404_960_720London seems down and out

If it was a case of looking at recent news stories, London is well and truly a goner.

Here are a few stories I have seen recently:

  • In the year to June 2018, Manchester house prices grew 7%; the prices in central London fell 4%
  • London house prices fell on average 1.9% in the first quarter of 2018
  • Average property values are falling in over 40% of London boroughs
  • According to a report in the Guardian, some 330,000 people moved out of London in the year to June 2018
  • According to the Resolution Foundation, about twice as many thirty somethings left London in 2016 compared to 2009, for reasons such as expensive housing and weak earnings.
  • The high earning financial sector is under threat because of Brexit.

And so on, and so on.

It’s the cycle, stupid!

A more considered look at London’s current situation, is more comforting.

After the last property recession, London prices bounced back faster than most other parts of the country.

In some parts of London, property prices almost doubled in the 8 years following the credit crunch.

What is happening in London now can be seen as the market taking back some of what it has given.

London prices got to a level where new buy-to-let investors as well as first time buyers simply could not afford to buy.

Investors, foreign and homegrown, moved to places like Manchester, Liverpool and Birmingham where rental returns were much better.

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The mid-cycle wobble

For some property experts, what is happening is not specifically about London but about the “18 year property cycle”.

It is not so much about something special and bad happening in London but more about the property cycle being at or near the “mid-cycle wobble point” where prices fall, but don’t crash, before growing aggressively and then crashing at the end of the 18 year cycle.

Some will argue that London is at the forefront of the cycle and the falls it is experiencing now will fan out to the rest of the country before not too long.

A look at the statistics does tend to back this up; there are often times when London is not doing well and the rest of the country is racing ahead; then the rest of the country falls back and London powers ahead.

It’s good up north!

In the property podcasts I listen to weekly, all the investment energy and excitement at the moment is being channelled northwards.

Almost every week I hear about the Northern Powerhouse and how places like Manchester, Leeds, Liverpool and Birmingham are the best places to invest.

Of course, it is true that these areas are doing great at the moment.

But how long will it last?

I have heard some commentators suggest these areas have another two/three years to enjoy healthy growth – sometimes the same commentators who champion the idea of a mid-cycle wobble.

Two/three years seems over-optimistic to me.

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Caution is the word

There is little doubt that caution should be the word for anyone thinking of investing at the present time in any part of the country – especially parts enjoying stellar growth.

The danger is buying at the top of the market – not such a problem for anyone intending to hold a property long term – but of course not everyone buys a property for the long term or is able to hold it for the long term.

If the mid-cycle wobble theory is good, and there is ample evidence that it is, investors and home owners alike need to be aware that the London downturn could start affecting the rest of the country at any point in the not too distant future.

The danger signs

Something I always watch out for is developers and builders offering non- price incentives to buy – for instance, furniture packs and offers to pay stamp duty and legal fees.

These are usually signs that the market is coming off the boil and prices are set to fall.

In areas enjoying strong growth, it is important to buy the best properties in the best areas where possible. Strong prices drive up all properties, including not so good properties.

However, not so good properties tend to keep their value less well when prices fall and may not prove to be the best investment longterm.

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The case for buying outside London

With prices outside London offering better value than London at the moment, it makes sense for homeowners and investors to closely consider the benefits of buying outside London, especially in our great northern cities and Birmingham.

However buyers should proceed with care. They need to conduct thorough due diligence to make sure that, as far as they can tell, they are not buying in a region, town or location where prices have reached the top, with the next move being down.

London will rise again

There are no good grounds for believing the current fall in London prices is permanent or that a shift in the balance of power is occurring in favour of the north.

London is too special a world city for property prices to be depressed for long.

The current fall in prices is great news for first time buyers and buy-to-let
investors of average means.

The sensible thing for first time buyers and buy-to-let landlords to do now is to focus on raising their deposits fast so as to be able to buy now, at a time in the cycle where it is a buyer’s market and prices are relatively affordable.

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Is now the right time to buy in London or will prices fall further?

That of course is the million dollar question. No one can ever be sure.

Wise property people say it is always best not to be obsessed about timing the market – about buying at exactly the right time.

My instinct however is that London property prices still have some way to fall.

If some 40% of London boroughs are experiencing price falls at the moment, I subscribe to the view that the others are also likely to experience falls before prices truly start to rise.

In terms of the “mid-cycle wobble”, there seems likely to be more wobbling to come.

But predictions of the death of the London housing market seem exceedingly premature. London is experiencing a downturn, but the upswing will not be too far behind.

Where do you think London property prices are heading? Your views may interest many of our readers. Please leave your comments below at the foot of this page.

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WHAT WILL LONGER TENANCIES MEAN ?

Are planned longer tenancies more about grabbing the tenant’s vote than tenant well-being?

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All the indications are that tenancies are set to get longer.

As I write, the government is consulting interested groups on its plans for private sector tenancies to be a minimum of three years, with a right for the tenant but not the landlord to end the tenancy early.

The Labour opposition wants to go for even longer tenancies, quite how long is not clear.

The stated reasons for longer tenancies

The government line is that longer tenancies will provide more security for tenants.

Government research reveals that 80% of tenants have 6 months or 12 months tenancies. However, interestingly, the same research also reveals that tenants stay at the same property for four years on average.

Why tenants need three year tenancies when on average they are able to stay in a property for four years is not clear.

If tenants were being moved on every 6 months or year there would be more logic to the decision.

There is no evidence that tenants are clamouring for longer tenancies.

The practice of agents charging exorbitant fees when tenants rent a new property is an abuse the government is about to ban.

Is the real reason for the change the shameless courting of the renter vote by both government and opposition at a time when more and more people are renting?

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The pros of longer tenancies for tenants

Longer tenancies can have advantages for tenants. Benefits include:

– Security of tenure for a longer period than at present
– Opportunity to plan with greater certainty and confidence in terms of work and family
– The costs of moving are lowered on account of less frequent moves.

The cons of longer tenancies for tenants

The negatives of three year tenancies may include:

  • Longer period of financial commitment; however there are plans to allow tenants to end tenancies early
  • Longer tenancies may restrict the opportunity for tenants to move regularly to achieve the most attractive rents when rents are falling
  • The model tenancy agreement likely to be recommended or required by the government could encourage landlords to raise rents in a systematic way annually, pushing up rents as a whole.

The position for landlords

Many landlords will not be fussed by the changes – saying that they effectively grant three year tenancies already by renewing tenancies annually for long term tenants.

However, this is a short-sighted conclusion.

There is a world of difference between being able to renew the tenancy of a good tenant annually and being stuck with a bad tenant for three years.

Longer tenancies mean landlords will have less choice and flexibility in the conduct of their rental business.

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Happy days for big landlords

It seems likely that longer tenancies will be another body blow for the small landlord who is without doubt being pushed out of the buy-to-let market by a whole series of challenging developments.

Longer tenancies are going to favour institutional landlords and investors and large corporations who want to and can afford to play the long game.

Some corporate landlords are already making a song and dance about offering 3 year tenancies.

But are they being offered because of concern for tenant well-being or because they fit beautifully into a model of long-term, reliable income meeting shareholder needs?

Is there an ulterior government motive?

What if the real purpose of longer tenancies is not fundamentally about tenant well-being, welfare and security?

My sense is that the dominant purpose is yet further private rental sector control.

Landlords will have less investment options and less control over those options if they are compelled to grant three year tenancies.

Their ability to sell as and when necessary will be restricted. It will be possible to sell with a sitting tenant but that is unlikely to secure the best price and may be a slower process than selling with vacant possession, without a tenant in occupation.

Landlords with one or two properties are likely to be put at real risk if they are unlucky enough to have the proverbial tenant from hell.

When property prices are falling, landlords wanting or needing to sell up fast may be unable to do so or only able to sell with the tenant in occupation, which is likely to further depress the sale price.

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Not the end of the smaller landlord

Long term tenancies are not necessarily the death knell for smaller landlords. If such landlords have a long term plan, securing good long term tenants can assist them to plan and grow long term income.

However, it will be more important than ever for smaller landlords to choose their tenants wisely.

The need to appoint good letting agents and secure the best tenants will be more important than ever.

They will also need to ensure that their mortgage cycles coincide with the duration of their tenancies – giving them the opportunity to sign up for the best mortgage products from time to time.

The need for greater professionalism

Longer tenancies are likely to push the amateur landlord, the non-professional landlord, further out of the buy-to-let sector.

Landlords hoping to remain viable and profitable in an environment of longer tenancies need to start preparing now for what the changes may mean.

They need to rigorously and honestly interrogate their property goals and plans in the context of a landscape of longer tenancies – seeking expert advice as necessary.

If their plans don’t stand up to scrutiny, they may need to look at property strategies other than mainstream buy to let.

It is no accident that so many buy-to-let landlords are increasingly looking at alternative strategies such as serviced accommodation, holiday lets and flipping.

What do you think about longer tenancies? Good thing or bad? Your views may interest many of our readers. Please leave your comments below at the foot of this page.

Rebel Property Coach
Dalton Barrett

DISCLAIMER: This bulletin, which is provided for information purposes only, is fully intended to be accurate but no representation as to its accuracy is intended. It does not provide legal or any other advice to be relied upon. All liability to all persons acting or not acting on anything in this bulletin is disclaimed. NOTE: Where you require advice to rely on in any matter, it is best practice to consult and retain a suitably qualified expert in the relevant field.

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