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Allsop Residential Auction February 2012: Results, Analysis & Conclusions – PropVestment

PropVestment provides a brief but insightful analysis of the results from Allsop Residential Auction in February 2012. We spent some time attending on behalf of a client looking to make a cash investment.

Allsop Residential Auction Headlines

  • 90% success for all lots in London and South East.
  • AST (Assured Shorthold Tenancy) yields over 10% 
  • Northern England struggling
Allsop Residential Auction

90% success rate at Allsop Residential Auction for London and South East

As you can see with the above chart, London as shown by the M25 statistics shows that over 90% auction success with an average price of £324,074. South East and South West also sold well with almost similar success rates however the values were significantly lower.

The worst success was the North East and Northern Ireland. The North East had the lowest success and the lowest average value for the Mainland. This means that this part of the country is the worst effected and the limited activity shows that even bargain hunting investors are staying well way.
The Northern Ireland results could be attributed to problems in mainland Ireland, however with only 6 lots that all sold, the data set is very limited.

Rental yields above 10% , investors market

The main information to be taken from these statistics is that most sales are investments for rental yields, with ASTs demanding lower prices but therefore higher yields. This can be attributed to risk factors.

An interesting stat is that sites with planning permission had a very low success rate, there are buyers there but sellers are keeping a high reserve on these.

CONCLUSIONS

As with previous auction articles like Auctions are for sellers we see similar stats here, majority of lots in London and South East sell well at high prices, however the rest of the market is struggling.
Auctions are for experienced investors and sellers, and not currently for first time buyers. 

*Graphics from www.allsops.co.uk Allsops Residential Auction

Auctions are now for selling rather than buying property

On Monday 6th February 2012 PropVestment paid a visit to Barnard Marcus residential property auction at Grand Connaught Rooms in London. We were in for a surprise as we were there as a buyer but soon found auctions are now for selling.
This was the first major property auction of 2012 in London. Thus it was pack out, many experienced and new property buyers in the hall.

Auctions are for buying not selling now

Lot 1 had guide of £800,000, a four bed house in Battersea, it went for £1.28m + 2.75% fees. This was the story of all the first twenty or so lots.
All the first 23 lots were in London, the average winning bid was over 30% above the guide price, taking out 5 where even at this level the Reserve was not met, the other 18 properties sold at over 36% above guide price.

A few other key high lights from this auction:

  • Most land only deals did not sell, reserve not met
  • A piece of land without planning permission for a possible 8 units went for £860k, that’s insane for the area, almost £110k land cost then planning then construction.
  • Most of the lots on by order of Mortgage companies got bids over guide however did not sell due to Reserve Not Met (RNM). This can only be the case as the lenders have over valued in the past and now face negative equity. Failures.
  • Properties in North England and Wales were the hardest sale, many RNM and a few with highest bids well under guide prices.

PropVestment Conclusions: Auctions are now for selling

Property Auctions have changed now, its a much more public affair and it seems that its no longer a place where you can pick up a bargain. The sellers use it to sell properties that otherwise will not fetch a similar price through traditional means such as local agents. This tell us something about the quality of the properties and legalities of them. There were many amendments to the information provided with particular importance on certain higher rentals, those properties were on the day changed to vacant possession. Therefore the guide rental was incorrect, how is one to know what the real rentability of a property is without doing thorough research.
Due to these pit fall, an auction is no longer a place for inexperienced or first time buyers to find a property to buy. Auction are now for selling.
Rather it is a place where landlords can easily offload not so good properties and rely on the ignorance or lack of research of bidders.

PropVestment Auction Advice
Buyers – Do your thorough research and get someone to look at the legal documents prior to bidding.
Sellers – Use auctions to sell unwanted properties, especially in London, everything sells

Have a read of our observations last year at Savills here

Short Lease: Good Investment or Bad Investment?

Came across this Short Lease listing today (below). Is it a worth while investment? £100k guide price.

The Short Lease listing

LEASEHOLD MAISONETTE VACANT POSSESSION
By Order of the London Borough of Enfield
Situated in a popular residential area, close to Trent Park and local shopping/ travelling facilities including Oakwood Underground Station (Picadilly Line).

A Self-Contained Purpose Built First Floor Maisonette with accommodation comprising:
Living Room
Bedroom (One)
Bedroom (Two)
Kitchen
Bathroom/WC
Leasehold for a term of 99 years from 25th December 1959 at a ground rent of £15 per annum.
Entire Vacant Possession upon completion

Short Lease

Short Lease, no problem

 

The maths

Its no secret that with only 46 years on lease most normal lenders will not lend.
So cash invest it.
£100,000 invested (if can buy for guide)
Rent: £13200 (based on asking rental for same flat few doors down)

46 years means over £600k income
Take out your £100k with saving account interest over first 8 years

Leaves £500k, yes half a million for not doing anything

The twist 

Call PropVestment and we will show you how to pull out your full £100k in 6 months and keep the property forever. Free lifetime Income

RESULTS – Short Lease
After publishing this article, one of our most read articles of all time, the property ended up fetching £187,000 in the auction and the buyer could extend the short lease to a whole 125 years for another £36,000.
Overall this ended up being a high price to pay for an property of this type however the buyer saw the future scope and realised that short lease should not stop you picking up a good property.

 

UK Property Market in 2012, the Investors’ perspective: Part Two – Market Activity

– Public Confidence

– Lending

Public Confidence

Market activity is dependant on a few things, firstly public confidence, this has seen a recent resurgence with many agents claiming great interest and newly registered clients in the post Christmas period.  People property search in agents as certain sectors start to turn around or the fact that the public know that interest rates are likely to stay low for the near future, houses start to seem affordable again. Together with the fact that many news sources are predicting higher rents on the market this year, a general upward trend is only exaggerated due to the Jubilee and Olympics.
Therefore buying sounds like a good option.

According to estate agents, the typical number of house hunters registered per branch in December was 294, 32 more than the average figure for November, with viewings continuing right up until the Christmas break, the National Association of Estate Agents (NAEA) found.
The percentage of first-time buyers also rose to 21% , continuing the increase since this section of the market hit its lowest proportion in nearly three years last autumn, although first-time buyers made up a quarter of the market during the same period last year

London was the only area to see price increases in December while respondents in the West Midlands and Yorkshire and Humberside reported the biggest drops.
At the same time, new instructions edged up for the third consecutive month during December, with 12% more respondents reporting rises in homes coming onto the market.
London saw the greatest increase in supply, with 38% more surveyors reporting a rise – the highest figure since January 2005

Lending

However there is a second all important component of buying a new property as well as confidence and interest is mortgage aspect. New lending is still very low and the stricter criteria means that even though people want to buy and sell, this is becoming the stumbling block, and as a result the sales are at one of the lowest points at the moment.

Transaction levels are likely to see a slight resurgence in 2012 and climb back to around 880,000, roughly the level of activity recorded in 2010. However, to put this in context, total sales in 2006 were almost double this amount at 1.67 million.

The weak economic picture anticipated for the next six months, along with the prospect of increased unemployment, means that demand to purchase property is unlikely to see any significant increase and will remain relatively flat.

Commentators and analysts expect sales to stay low – perhaps even lower than they have been in the past year. That means 2011’s eventual total might even be lower than 2009’s figure of 859,000 sales for the whole year – the lowest since modern transaction records began in 1978.
Even the reluctance of lenders to repossess many of the borrowers who are now in arrears has played its part.
With tens of thousands fewer homes being repossessed than lenders had predicted just a couple of years ago, the market has been deprived of the cheap homes that would otherwise have been put up for sale.

PropVestment Conclusion

The public are ready, investors are ready, the financial institutions are holding the property market back.

People are looking to buy a house?

Sources:
http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/9024366/Property-sales-fall-to-lowest-level-for-a-year.html
www.bbc.co.uk
www.homemove.co.uk

Business property values slow in November, but insurance lenders will make a difference

Research by the CBRE, one of the world’s leading commercial property advisers, suggests that commercial property values have ground to a halt in November, but that the increased involvement of insurance companies might make a difference.  According to the CBRE’s latest monthly index, last month’s capital value returns registered at only 0.4%. This makes total returns for business property at 7.6% for 2011, with capital growth of 1.9%. Central London property has performed consistently, although the wider picture has seen only shops and retail warehouses avoid falls this month. London office and retail performance has offset falls in rent elsewhere to ensure that rents remain flat across the board.

Nick Parker, senior forecasting analyst at CBRE, described the results as unsurprising given the signs of deterioration, and noted that investors were becoming ever more focussed on prime property:

“November was the first month this year where more widespread weakness started to creep into the UK property market performance with more real estate sub-sectors seeing capital value falls than gains.  “Given the wider economic uncertainty caused by weak fundamentals in the UK economy plus the growing threat posed by the Eurozone, it now seems that investor appetite has once again become more narrowly focused on the super-prime end of the quality spectrum at the expense of assets further up the risk curve.”

However, the competitive presence of insurers, CBRE notes, offering better loan-to-value deals and better margins, has propped up real estate activity and could account for as much as 20% of commercial property lending in the future.

Insurance companies have progressively increased their share of real estate lending after retail banks began showing signs of reluctance. With the number of business property lenders actively lending down in 2011, it is hoped that the impact of insurance companies evolves beyond the prime end of the real estate market, which is where their lending capacity is largely based at present.

Author

Carlo works in the real estate sector and writes about investments and commercial property in London and in the UK. He likes industrial architecture, nature and traditional british food.

UK Property Market in 2012, the Investors’ perspective: Part one – House Prices

Looking at various property professionals and organisations we analyse the UK Property Market in this series of articles.

-UK property prices expected to fall up to 3% in 2012RICS

-House price Stagnation remainsNationwide

-Up or Down? Depends where you arePropVestment

House prices are always the primary topic when it comes to analysing the the UK Property Market. 2012 is no different. The question remains what component of house prices should be used in analysis, is it the asking price, is it the RICS or bank valuation or is it the selling price.

In my opinion it is the selling price that is all important taking in the UK property market in all dimensions without any bias. This is house prices, the real deal.

RICS:
Sales of UK residential properties may rise a little in 2012 but prices will struggle to follow suit. Prices at a headline level will edge lower by around 3% across the UK. However, the low level of supply should continue into the coming year, stabilising prices and preventing significant declines.

Nationwide:
“The average home rose in value by 1% in 2011 to £163,822, but fell by 0.2% in December compared with the previous month.
The economic climate was likely to lead to a similar situation for the housing market in 2012. There were geographical differences. Prices in Northern Ireland fell sharply by 8.7% in 2011 but rose in London by 5.5%.

Not enough homes are being built. In 2011 just 107,000 new homes were built. The government has forecast that every year from 2013 to 2023 an extra 240,000 new households will be formed, mainly due to the growing population. This means upward pressure on UK house prices.

However house prices are not only determined by the balance of supply and demand, but by how much money lenders are willing to lend. If prices were to start falling sharply, banks would be even tighter and there would be less and less mortgages approved and therefore less completions.

There may be eventual increases in interest rates further down the line, and no return to the days of easy lending, mean that house prices will fall for several years to come.
House prices have to keep falling until they get back to long-term norms of about three or four times earnings, they are still about seven or eight times earnings – they still have a long way to go.

Is London special?
Central London has been an exception to the rule, along with prosperous parts of the South East. Here house prices  have rise in the past couple of years and are now back to their peak levels. Property prices in London rose by 5.5% in 2011
Firstly many of the new jobs created in the past year or two have been in this part of the UK.
More interesting though is wealthy foreigners who looking for a safe home for their cash by buying a flat or house in central London, as well as your expected Middle East and Asian Investors there has been a significant rise in investors from Greece and Italy who are desperate to get their cash out of their country.

The BBC did a survey among experts, listed below, as you can see not a single individual is predicting an increase.

Property price predictions 2012

  • Ray Boulger – down 4%
  • Bernard Clarke – “a broadly flat market”
  • Jonathan Davis – down 10%
  • Martin Ellis – “unchanged plus or minus 2%”
  • Robert Gardner – “flat to modestly lower”
  • Henry Pryor – down 10%
  • Simon Rubinsohn – down 3%
  • Ed Stansfield – down 5%

PropVestment UK property market House price summary

House prices are a result of multiple market factors, interest rates, mortgage availability and amount, demand and supply etc… from all the data analysed there is not an optimistic outlook for 2012. However there is always opportunity, I very much doubt any significant falls in the South East and London. A drop on prices else where means for affordability that may kick start the market. From an investors perspective rents are also a vital part to any investment so keep watch for the other parts in the series.
Overall prices probably will not rise much but won’t fall significantly either, worry is if the Euro collapses what will happen to our mortgage market? How will our banks react? This is in my opinion the most important factor to keep the market ticking over.

Sources:
http://www.propertywire.com/news/europe/rics-property-prices-uk-201112225903.html
http://www.bbc.co.uk/news/business-16288438
http://www.bbc.co.uk/news/business-16356568


How to calculate your REAL return on Investment: 5% becomes 35%

The REAL Return on Investment

Traditionally property return on investment is calculated by rental yield, especially when it is being compared to returns of other types of investments. However I believe it is a much more exact science, and can vary significantly depending on specific properties and on how the investor structured the deal when purchasing the property. A traditional yield of 5% can actually be 35% if the deal is right.

Let me start with a simple example. A two bedroom flat, bought with standard Buy-to-let 75% finance, at 5% interest only for £200,000 that is renting out for £10,000 per year. Traditional yield will be 5% (rent/value=10/200=5%). Under the way I calculate it, the rent less the mortgage interest divided by initial money in, therefore for this deal ((£10,000-£7,500)/ £50,000) so its 5%. The “real” return on investment is still the same.

But wait, what about capital gains, this is still a form of returns even though they may only be realised at a much later stage when selling and that will be liable for Capital Gains Tax. Well that is not strictly true, if the investor remortgages again after a year with similar terms, 75% of the capital gain can be realised. So if we make a very conservative and modest assumption in present gloomy market conditions of a 5% increase in value that is £10,000 and if we take 75%, and add it to the surplus cash from earlier that is a total of £10,000 return, effectively 20% return on the deposit paid. That is an amazing return, which I can’t see any other form of investment where the risks are so low and the investor has so much control over the asset.

There are certain things we have not considered like remortgage costs, legal and stamp duty, maintenance, and tenants. These will of course change calculations. Also the reason I simplify with a interest only mortgage, because if it was repayment that add to the capital or equity of the property so in effect cancels out the cost, although in realisation it will only be 75% realised when remortgaged.

Let’s be a bit more adventurous now, and add a few more clever changes to the model. We have to cap the borrowing at 75% LTV because that is the realistic maximum in the current lending condition. Let’s say the purchase price was 15% BMV (below market value) but the Mortgage was LTV, and the investor used a £10,000 personal loan at 10% compounded with capital and repayment due in two years, to part gather the deposit. So the initial investment in, is £10,000, the rest is the personal loan and the BMV saving. Assuming rent is steady; let’s look at the situation in 2 years time.

Property value in two years is now £220,500, so a refinance would raise an £15,375, less the loan that needs to be paid back (£12,100), plus £5,000 rent surplus which means £8,275 cash inflow, or 82.75% over two years on what was invested, so that is 35% return on capital invested per year.

There are incredible deals available; you can look around yourself, internet sites, auctions, personal contacts. If all else fails, contact us, info@PropVestment.com. You have to be clever with the way you invest, market condition are against us so we must beat the system and be innovative in our thinking.

Please take caution in tricky deals and do all your due diligence, the figures I use are fictional but are close to what is really possible.

How do you calculate your return on investment?

QFKUDEMEN4KX

 

Part Exchange Properties: Genuine developer offers or WeBuyAnyHouse4cash scams?

For many years now it has been the norm that we take our cars to the dealer and part exchange them when upgrading to a newer or larger one, however this is a phenomenon becoming increasingly more occurrence in the UK property market.

What is Part Exchange or “PX”?

In a similar way to how it works for cars, you are looking to buy a new house, but can not sell your current house privately, and the agent/seller of the house you are interesting offers to take your existing house or old property as part exchange for the new one.
The biggest challenge is finding a seller willing to do this, and like cars it is usually only the big builders of new homes. They are keen to sell and often have a handsome profit margin from the construction to selling price.

‘PX’, as it is known in the property trade, allows greater financial and timescale certainty for sellers, especially in today’s dipping and uncertain market, where homes are taking  months just to find a buyer plus months more for paperwork to be finalised.

Developers are the biggest promoters of PX facilities, mostly to help shift homes priced between £200,000 and £400,000. They believe it tempts buyers into moving more rapidly, because in theory it can avoid delays incurred by registering with estate agents, arranging viewings for prospective buyers, and negotiating over offers.

But while it can clearly be helpful for sellers, there is a hitch. Those opting for PX must accept less than the market value for their old home in return for the certainty of being able to get it off their hands.
The developer typically offers around 90 – 95% of the market value of your current home, but it’s a guaranteed sale, it usually happens fast, and it avoids the need for estate agency fees.
Read more

Stagnant UK Property Market: Sellers’ Perspective

It has been widely reported that the current market conditions are such with very low volume of transactions, falls in mortgage approvals, and an overall stagnation in the UK property market.

House Price Crash shows very clearly the levels of mortgage approvals and the graph illustrates this with fine detail. Click on the link.

The amount of new mortgage approvals for house purchase, (but not yet lent), rose to 45,940 in May 2011 from 45,447 in April. However May’s approval figure was lower than the average for the previous six months despite the slight increase, according to figures released by the Bank of England.

Nationwide’s index has prices remaining stagnant since May, and down 1.1% annually, while Halifax has prices up 0.1 % in the same month and down 4.2% annually, while the Land Registry has prices down 2.3% annually. Overall there is clear evidence of stagnation in the market.

It is important to analyse the factors causing this and the mind set of Sellers’ and what is causing them difficulties.

Once again today the UK Base rate was held again at 0.5% for the 28th month running. It will be interesting to see the divide in the Bank of England committee when the minutes are released.

Lending to individuals

At PropVestment we sight two major problems causing this stagnation. Firstly Sellers are too over optimistic, thinking that their property should have risen along the same rise levels as seen before the credit crunch, and cannot come to terms with a possible drop in value, so they set their asking price above what is realistically achievable and representive of their property.
This means that many properties stay on the market longer, the few that are closer to realistic values and are lucky enough to attract attention of the buyers suffer from a secondary factor. Price agreed, next step acquire a mortgage approval.
When the bank valuer goes to value the property, its significantly undervalued relative to the asking price, the mortgage offer comes at a LTV of this valuation, leaving the buyer with a shortage to complete. Result, the deal falls through.

Why should a seller sell? Well with current interest rates, many PropVestors have mortgages around the 1-2% mark, they are enjoying a healthy surplus on rents and selling just means, realising Capital Gains Tax.

Therefore if one does not need funds else where, logic says to stay put, not sell and lose a chunk to the tax man and instead enjoy the cake of higher rental yields to mortgage installments.

Further as stated in our last article, it has been stated that rents, in particular in Central London, are expected to rise 8-10% in the year to come. Investors are well placed to get great returns. Especially where the mortgage costs are not looking to rise due to the base rate on hold.

The UK mortgage market is still quite inactive, even though data is showing an recent increase, from our personal experience and that of our clients, the lending criteria is very strict and stringent and only those that fall into a model profile, income base, age and credit history are the ones where mortgages are being approved. Further to this the LTV (Loan to Value) is still surprisingly low in comparison to boom times. Sellers do not want to accept the lower valuations and feel their properties hold more value so will not sell at current market prices.

PropVestment concludes that from a sellers’ perspective the primary factor why sellers are not as active as they would like to be is simply that the returns are just too good, and staying put is the best option. Even those looking to sell, find the potential buyers are not capable of securing the finance to meet asking prices.

LENDERS START LENDING, SELLERS & VALUERS GET REALISTIC

Last Month : Buyers’ Perspective
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Today: How the Spending Review will affect the Property Market

PropVestment: Spending Review

Today, Wednesday 20th October at lunch time will announce his plans for the Comprehensive Spending Review setting out the Government’s spending plan for the next four years. It has been widely accepted that the worst hit is going to be public sector workers, with estimates of up to half a million job cuts on the cards. The other major factor that will affect Property Investors is the speculated 20% cut in housing benefit spending and other welfare spending cuts.

The most effected areas will therefore be where there are a high proportion of either public sector workers or high concentration of residents on housing benefits or other benefits.

London will be the least effected and most resilient region as expected; having only 4% of the workforce in the public sector, however there may be areas with high concentrations where there are council estates etc. These small packets of property will see prices suffer as rental yields fall and lack of demand from affluent tenants, these kinds of phenomenon will be short lived as do investors should buy as prices fall over the next few years. Prices will bounce back, London has scarce land and there is always demand, as people move away and then a mix of students, foreign workers and professionals move in. This has been seen all over council estates in the inner city areas especially in zone 1 and the boundaries with zone 2. Of course in the short run it will be difficult and investor will need cash that is stalemate for a while, but there will be bargains and great long term gains for those who have the patience and capability to wait and sit tight.

Some of the worst hit areas may be stereotypically middle class areas such as Oxford, Cambridge, Canterbury where over 40% of the work force is public sector and property prices have already dropped 3-9% over the past three years. This supports the prediction that properties associated with public sector workers will be hit hardest, due to unaffordability and potential job losses.

Update from Upad.co.uk

Benefit cuts mean families with less money.
The bulk of the spending cuts will be coming from the welfare budget and we’re talking total cuts of £18bn a year by 2014 with an overall decrease of £81bn. This includes previously announced cuts in Housing Benefit and Local Housing Allowance as well as significant cuts to other benefits and tax credits. That’s going to mean a good deal less money sloshing around amongst people on lower incomes. Unless you are only renting high-end properties, and that’s generally quite unusual, then it’s likely that the people you are letting to will have less ready cash. That could spell trouble on rent levels and also with arrears.

Unemployment hurts everyone
The Chancellor’s “best guess” regarding job losses is that these changes will add nearly half a million unemployed to the dole queue, predominantly amongst public sector workers. These job losses are already filtering through with many quango employees already receiving redundancy notices. Job losses, and even fear of unemployment, make people more fearful of making changes. It’s easy to argue that’s good for landlords as many people will stick to renting or move back to it until the dust settles. But in any case uncertainty in the employment market is bad news.

Cuts will slow down Councils and Courts even more
We’ve looked at the economy in general. But start thinking about how these cuts might affect how you run your affairs as a landlord. Do you ever have any dealings with your local authority? If you let HMOs, you certainly will and there are plenty of situations that see a landlord interacting with their local Town Hall. Councils are notoriously slow in dealing with paperwork and decisions already. The CSR cuts the grants to local authorities and requires greater efficiency and job cuts. I can’t see how that’s going to improve the service landlords get from their local council.

One other government department that has promised to find savings is the Ministry of Justice that administers the courts system. Whether we’re talking squatters, rent arrears or anti-social tenants, getting legal action takes a long time already. Landlord Action recently noted that getting the relevant Court Orders can take as long as six months. We agree with them when they say that’s too long. Action needs to be taken in weeks not months. But it seems that these Ministry of Justice cuts will extend rather reduce the time that landlords have to wait for proper legal protection for their properties. That’s going to cost landlords a lot of money.

Do you let a student house?
Thinking more laterally, we can see that even less obvious changes in today’s announcement will likely have an impact. The Higher Education budget will be slashed by 40% and the recommendations of the Browne Report implemented for university funding and tuition fees. The doom-mongers are saying that these moves will see a drop in student numbers. Any such decrease will doubtless have an impact on landlords renting to students in university towns and cities.

There may be trouble ahead.
Whilst we can see the logic in some of the Comprehensive Spending Review cuts, we certainly take no pleasure in them. Such is the magnitude of George Osbourne’s plan, that they must be considered carefully. We don’t have the full picture yet and the devil is always in the detail. So whether you think they are right or wrong, every landlord must agree that they’ll have a significant impact on the residential lettings market all over the country. And we believe that for many landlords the impact will not be good news.

 

More updates to come as new develops

Please post your views too.