Property

A cooler housing market gives hot opportunities for investors

Alan Collett - Hearthstone Investments -
|
11th May 2018
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Despite the gloomy headlines on property prices, the outlook for residential property investment remains strong.

Recent headlines around the residential property market can be read as depressing to say the least. Halifax found that house price growth fell in April, the Royal Institution of Chartered Surveyors (RICS) saw a continued fall in new instructions and the Office of National Statistics reported that London had the UK’s lowest annual house price growth with a decrease of 1.0% over the year.

But behind the discouraging headlines, the picture for investors in residential property is actually very different. Part of the reason is some of these statistics deal with turnover in the market, the number of homes listed for sale and then sold, which is key to lenders and estate agents. However, for investors, the important figure is their returns, made up of rents received, increases or falls in rental values, increases or falls in house prices.

Crucially for investors and their advisers there are several reasons why the outlook for rents and rental values remains strong. As the RICS figures suggest, there is a continuing shortage of housing and, although there are regional variations across the UK, in most parts of the country there is significant support overall for rents and house prices. The Halifax Housing Market Outlook for April stated its expectation for house price growth due to continuing low mortgage rates, great affordability levels, a robust labour market and the continuing shortage of properties for sale.

In addition, the size of the private rental market (PRS) has increased year on year for twenty years, and now provides homes for 20% of all households – recent figures from the Resolution Foundation suggest this growth is set to continue, with a third of today’s millennials potentially still renting into retirement. However, it is a regrettable fact that the homes in the PRS are on average older than owner occupied home, with 35% having been built before 1919, and a worrying 27% of them fail to meet Decent Homes Standards.

For good landlords offering professionally managed modern homes, this represents an opportunity to pick the best tenants, who benefit from living in a high quality, well maintained home and in return provide investors with greater, longer-term security over rental income. The average length of stay in such homes is already over two years and is rising, after all a good tenant is an asset and a long-term investor wants them to stay as long as they can.

Although the Office of National Statistics UK House Price Index reported transactions as flat in February, they recorded 101,000 home sales in the month, a figure which had not varied up or down by more than 2% in the whole of 2017. Looking at it another way, there were over 1.2 million housing sales in 2017; hardly a poor market, even if estate agents and conveyancers would like to see more. From an investors perspective this is a liquid market in which they can buy and sell, and a market which provides more than adequate evidence for valuations.

Although the Office of National Statistics reported a fall in house price growth in London, the picture varies considerably across the capital, with Barking and Dagenham, Bexley and Havering each recording more than 4% growth, while Camden and Hounslow saw 1% falls. This is mirrored across the UK as a whole, with higher annual growth across the Midlands and South West, and is supported by RICS data, which recorded significant regional variations in both the level of enquires and also in the expectations of house price growth. London and the South East showed the lowest confidence. The same regions that are expecting growth in values are also expecting rents to remain in positive territory.

The well-respected research from Hometrack (UK Cities House Price Index February 2018) also shows London divided with almost an equal number of value increases and falls, but the major regional cities, with the exception of Cambridge and Aberdeen, all being positive, with five of them registering growth of more than 7% over a year.

All in all, there are plenty of opportunities for property investors despite the “cooling” market.

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