What does the UK homes shortage really mean for property investors?
UK property values will continue to rise
Investment education sometimes complicates the basic nature of price performance. Prices rise when demand is higher than supply, and prices fall when the supply/demand fundamentals reverse. As a property investor, your objectives boil down to either making a capital gain (selling at a price higher than the price you paid for an investment property), receiving income from rent or both. These financial objectives are at the root of why I invest in property: to create the lifestyle I want.
Here, I’ll examine the supply/demand picture in the UK housing market, what it means for the future of property investment, and explain why savvy investors weren’t concerned by the Global Financial Crisis (GFC) and the hit to investment property prices.
Excess demand for UK homes is not new
The gap between demand for homes and supply of new homes is not new in the UK. A parliamentary report investigating the future of the UK housing market shows that as far back as the late 1970s the property market was stressed. In fact, since around 1984 (and as the chart below shows) in only about one in every three years has the supply of new homes been higher than the demand. Even then, this oversupply was minimal.
Demand for UK new homes is set to increase
The assessment which is perhaps most interesting for property investors is that supply looks likely to remain reasonably steady, while demand continues to increase. It’s estimated that this demand will stretch as high as 300,000 each year. 2016 was a recent record for housebuilding, with 189,000 additional homes created.
The government has set a target of 200,000 new homes each year during this Parliament. Over the five-year term, that means the accumulated shortage will be as much as 500,000. With this volume of undersupply, there is only one-way residential property prices are going, and that’s up. And let’s not forget that housebuilding can’t simply be switched on: it takes time to release land, get permissions to build, and then develop new homes.
Of course, some of this excess demand is due to immigration and foreign investment. Experts tried to call the end of rising property prices when the electorate voted for Brexit. They told us that immigration would come to a sudden halt and that foreign investment in UK residential property would dry up. The market is coming to the realisation that neither forecast looks likely.
The latest immigration numbers showed that immigration into the UK is at record levels. The government is rapidly moderating its rhetoric about the ability to slash immigration numbers. Net immigration looks likely to remain in the hundreds of thousands rather than the tens of thousands.
Foreign investment into UK property has been bolstered by the fall in the pound. Overnight, London property became between 15% and 20% cheaper in the currency of the foreign investor. Instead of falling, as many experts had predicted, investment into the residential property by foreign investors has increased.
The result? House prices are rising as a continued new homes shortfall is forecasted, and overseas investors remain confident in the UK economy and housing market.
The rental market is heating up, too
A report in October last year concluded that the UK is facing a “critical rental shortage”. The Royal Institute of Chartered Surveyors (RICS) forecasts that the number of households that want to rent rather than buy will increase by at least 1.8 million by 2025. That will push the number of households that are renting from 5.4 million to around 7.2 million before the end of the next parliament.
Supply and demand – rental prices are not going to fall.
How do you benefit from the homes shortage?
It is no secret that there’s a massive shortage of homes in the UK. The state of our property market has been hitting the headlines for as long as I can remember. I wasn’t concerned about the fall in property values caused by the GFC, because where I’d bought properties because I knew that demand would continue to outstrip supply.
And that’s the real secret to profitable investment in residential property (if there is a secret): go where the demand is. Buy in locations where demand is set to be strong for decades. Research the property fundamentals and make sure that the following are all in place:
- Shops
- Schools
- Transport links
- Major employers
- Major investment
Do this, and when the market gets spooked by the big, macroeconomic issues like Brexit, the next GFC, and market downturns, you’ll see opportunity where others see despair.
Of course, there will be times when property prices fall, and rental prices ease slightly. If you invest in areas where the property fundamentals are weak, your investment will be prone to higher falls and lower rental income.
So, do your research and buy in the best places to invest in property UK. It will protect your investment from the sudden big shocks over which you have no control. Your property investment will be more resilient during slow periods, and continued demand will ensure that capital gains and rental income rise at rates above the UK average.
Contact one of our team today on +44 (0)207 923 6100 to discover why investors that use the strategies and methods described in my award-winning book, The 3+1 Plan, see opportunity when others see despair.
In the 3+1 Plan, you’ll learn:
- how to do your research;
- how due diligence makes certain that you invest in the right property and in the right location; and
- how a cash flow strategy will ensure you never overstretch your finances when investing in property.
It’s this investment education that will make sure you always take advantage of the UK homes shortage, and that you’ll benefit from the highest capital gains and rental income throughout the property trend cycle.
Many would-be property investors argue that buying off-plan property is too risky. They’ve heard horror stories about investors who have lost their deposit because the developer has gone bust. They ask why on earth anyone would pay out for something that isn’t yet complete and might not be for another year or longer. At the other end of the scale, the best off-plan property investors don’t care about recessions and invest with an almost 100% certainty of making money.
In this article, I’ll look at the risks of investing in off-plan property and how you can cut those risks to the bone.
How to minimise off-plan property risks
I’m not going to tell you that there are no risks when investing in off-plan property. There are risks in all investment opportunities. I’ve known stock market investors who have lost millions overnight because the company they invested in went bust. The 50% plus probability that a new company will fail within five years doesn’t stop entrepreneurs from starting new businesses.
When you invest in off-plan property – or any property, for that matter – it’s important that you get real about the risks of property investment. Yes, there are risks: but those risks are no different to the risks you take when you book a big family holiday a year in advance or reserve the venue and caterers for your wedding. Other big risk-takers include:
- Buyers of luxury cars like Ferrari, Lamborghini or Aston Martin, who wait up to three years to sit behind the wheel of their new car
- Airlines that put down millions of pounds for new planes which are years away from getting off the ground
Whenever you make a big ticket purchase or investment decision, if you go into the deal with your eyes wide open not only will you have less worry about the risk, you’ll also be able to take the actions necessary to reduce any risk to a minimum (like booking your holiday through an ABTA travel agent, for example).
Let’s look at the major risks of investing in off-plan property and how to reduce those risks.
Off-plan property risk #1: Developer goes bust
It happens – most often to new, inexperienced developers who have overpaid for land or haven’t got the right financing in place to make their numbers stack up. But developers don’t go bust as often as the media would have you believe. When a developer goes bust, it makes headlines. The media love sensational stories. To get to the truth behind the headlines, property investors should never believe all they read in the newspaper – the majority of off-plan developments are completed on time and within budget.
Stick with developers who have a track record, and make sure your deposit is protected.
Off-plan property risk #2: The property doesn’t meet the agreed standard on completion
It’s hard to envisage what the property will look like when you’re working from nothing but drawings and a plan. The developer may run into problems and have to spend more money on getting the foundations put in than it believed it would have to. They cut the budget in other areas to compensate.
Visit the development regularly (or have someone visit for you) and stay in touch with the developer to ensure that the build is progressing how you expect. Again, make sure that the contract is watertight, and that any shortfall in expectations is made good by some form of discount or compensation. Before making the final payment, make sure that you inspect the property with a fine-tooth comb by snagging the easy way.
Off-plan property risk #3: The property doesn’t rise in value as expected
It is a market risk. No one can tell what property prices will be in six months, never mind two years or more. There is a risk that you buy an off-plan property, and it falls in value – the same as when you book a holiday and find it cheaper elsewhere, take a new job and discover you could have got more money at a different company, or invest in existing property and a recession hits property values.
To cut this risk, do your property research and only buy in the best places to invest in property UK. Whatever type of property you buy, make sure the property fundamentals are in place before you invest. You’ll want your investment property supported by shops, schools, transport links, major employers and major investment.
Off-plan property risk #4: Oversupply destroys your rental potential
You might find that when the development is complete, you face big competition for tenants because so many of the properties are now owned by buy-to-let investors like you. If 50 or 100 apartments come onto the market at the same time, your property could get lost in the crowd.
Again, research is key. Ascertain that there is a rental demand to support the new development (and other developments in the area). Ask the developer how many properties will be sold to buy-to-let investors. Take advantage of investment opportunities that are complimented by rental guarantees.
Off-plan property risk #5: Your investment property is difficult to sell
Whether you want to sell before completion or shortly after, you may find it difficult to do so. Often this difficulty is due to price expectations (or needs).
Make sure that when you purchase off-plan, you do so at a good discount to valuation. The bigger the discount, the easier you’ll find it to sell because you’ll have more negotiating room on price while maintaining a good profit margin.
Get real about risk reduction when investing in off-plan property
Ok, now that you’ve got real about the risks of investing in off-plan property, let’s get real about reducing those risks. Like my dad used to tell me, you’ve got to put the effort in to reap the reward. Here are the six things to do when you invest in off-plan property to reduce risks to a minimum:
- Research the location, to ensure that it benefits from the property fundamentals to support property values in the medium and long term.
- Research the developer, to make sure they have the track record and financial backing that will give you peace of mind and ensure they don’t run out of money halfway through the build.
- Make sure that the contract of sale includes clauses that protect your investment. The contract will detail elements of investment that include the schedule of payments, standards of finish, and penalties for late completion. Always make sure that your solicitor reviews thoroughly, and that your solicitor is experienced in dealing with new build and off-plan property investment.
- Visit the site regularly, and keep in touch with the developer to ensure that progress is ticking along as it should.
- Get the right financing in place early. Use a buy-to-let mortgage broker to find the best deal and the one that is most suitable for you and your investment objectives.
- Work with an experienced partner who can guide you and make sure you avoid the mistakes that can damage your wealth.
Take advantage, maximise profits and minimise risks
Gladfish have been helping first-time and experienced investors make the best off-plan property investments for more than ten years. Working with developers that have the best track records, we ensure that investors get exclusive access to early-stage investment opportunities. It is the time when we can negotiate great prices for investors. These discounts will help support your investment, as will our unique set of investment guarantees – which includes rental guarantees.
With access to some of the best off-plan property solicitors and buy-to-let mortgage brokers in the business, you’ll also benefit from an end-to-end sales progression process that takes the stress out of investing in off-plan property and keeps property investment simple.
Contact one of the Gladfish team today on +44 (0)207 923 6100, and start preparing for the profit potential of off-plan property investment with the minimum risk.
Investment Education – Why developers need to sell off-plan property
As a property investor, one of the main attractions is the enormous profits that are possible by using leveraging to grow a property portfolio. Property developers understand this investment strategy, and they also use leveraging to maximise their profits. In other words, rather than using their money to see a property through from planning to completion, they’ll use other people’s money. However, whereas you or I might finance a property investment with the aid of a buy-to-let mortgage, developers need to use some financing strategies to fund building.
In this article, you’ll find out how developers finance their new build projects and why off-plan sales are so important to them.
Lenders don’t want to lend
Okay, so this is a concept that most people find really difficult to get their heads around. Lenders, like banks, who make their profits by lending, don’t want to lend! The reality is that they are not in the risk business that you and I are in when we invest. They don’t take the risks that property developers do when they buy land and build property. Lenders want to sit back, take no risk, and reap the rewards of having the cash to lend.
When making a loan to a developer, the lender will treat them like it treats you or me when we ask for a loan. It will assess the strength of the borrower and the viability of the project. Where we need to provide a property valuation, developers have to give the lender a feasibility study. The types of loan that a developer might require to finance the project include:
- An acquisition loan to fund land purchase, permissions, and other pre-development costs
- A construction loan to cover the costs of building
What other criteria do lenders want from a developer?
Apart from a good track record and a detailed feasibility study, a lender will also expect the property developer to foot some of the costs of buying the land and building the residential development. For example, let’s say that a developer has identified a project and cost it out to £10 million. This cost includes the land purchase and building costs. The developer might finance, say, 50% of the land costs and 70% of the build costs. If the land costs £2 million and the build £8 million, then the developer needs to come up with £3.4 million instead of the whole £10 million.
How development loans are repaid
Commonly, developers are expected to repay the development loan in stages. These coincide with project milestones, and would typically include the base stage, fixing stage, and completion. It gives you an idea why property developers release their properties in stages: doing so allows them to repay their loan commitments. The lender will have to place penalties or higher interest charges for late payment – so it’s in the developer’s interest to complete each stage by the time it says it will.
An interesting fact about development loan interest
The interest on a development loan is usually capitalised when the loan is made. It simply means that the developer doesn’t pay the interest as you and I would on a residential mortgage, but instead it is added to the amount borrowed. Every month the interest is added to the amount outstanding, and so interest is charged on the interest added.
Again, you can see that it’s in the developer’s best interests to sell property early and repay the loan. If the developer doesn’t do this, the interest owed can mount up quickly.
Other types of financing
Banks and lenders are not the only route to financing a new build development. A development company could set up a joint venture, for example. In this case, the developer provides the expertise, and its joint venture partner provides the cash. The developer’s partner would not charge interest on the funds provided, but instead take an equity stake and a percentage of the profits (like the investments made on Dragons’ Den). Even in this case, the joint venture partner will probably want to see that there is some financial commitment from the developer.
A developer may also be able to access what is known as ‘equity and loan funding’ – this simply means that cash is provided, but the lender reserves the right to convert the loan into equity. In such an arrangement, the lender would convert the interest (plus capital repayment) it would receive a share of the profits.
Why do you need to know about developer financing?
It’s always good to know that a developer is committing at least some of its capital to a development project. For the lender, it gives a cushion of comfort (the same reason that, as an investor, you can only borrow to a maximum of 70% of a property’s value). As an investor, seeing that the developer is willing to risk its cash gives me a sense of security – if the developer is willing to take that risk, then so am I.
However, understanding how a developer funds a project also helps you to understand how its pricing policy on property sales evolves during the lifetime of the project:
- At the early stage – sometimes before the ground is even broken on the build – the developer will want to make sales to get cash in quickly. It provides financial momentum for the development, is cheaper than borrowing from a bank, and also provides a record of pre-sales that will help the developer to access future project loans at better rates.
- Those early sales are the ones where the investor is in the strongest position. The properties have not yet been built, and the developer is cash hungry. At this stage, you can negotiate some very sexy discounts to market value.
- As the project matures, the developer becomes less needful for cash. It can afford to negotiate on price much harder, and its profit margins increase.
The earlier you invest in a development, the better your profit is likely to be – not simply because of market movements, but because of development financing dynamics. Developers make their profits on sales made towards the end of the development timeline. Investors make the best profits when they invest early.
The problem for individual investors is getting access to early-stage off-plan property investment opportunities. To find out how you can do this, contact one of our team today on +44 (0)207 923 6100.
Here’s how professional property investors laugh at the taxman
As long ago as 2015, the experts were forecasting the death of buy-to-let investment property. Here we are in 2017, and despite all the property tax changes the private rental sector (PRS) is very much alive and kicking. PwC predicts that the number of tenants in the PRS will increase by 1.8 million by 2025 to 7.2 million.
This high demand for rental property will drive investment opportunity. The key to identifying and profiting from this opportunity will be to evolve with the market and be organised to take advantage of it. In this article, you’ll learn how you can do this.
Investors in residential property remain confident
In July 2016, a survey by Allsop found that around one in five property investors intended to add at least one property to their portfolio over the next 12 months. The same survey found that 71% rated property investment as preferable to all other investment opportunities.
Contrary to the forecasts of the doom-and-gloom merchants, professional property investors are growing their portfolios, not offloading them. This confidence in property as the best investment exists because professional property investors can adapt, evolve and prepare for pretty much anything that’s thrown their way – including UK property tax changes.
Here are the four things you can do to stay confident and profitable in property investment:
1. Know your investment objectives
Before you do anything else, know why you are investing. Do you want to increase your income stream now, or start preparing for early retirement? Do you want to profit from rising property prices, and what is the timescale for your investment?
An investment in property can provide exceptional income and growth potential. Knowing which you want (or if you want both) will help you determine which property is best to invest in and how it is best to invest.
2. Prepare for the things you can’t control
No matter how much we’d like to, we cannot control UK property tax. Over the past couple of years, the government has used tax like a battering ram against buy-to-let property investors. They hit us with higher stamp duty on purchases of investment properties, the abolishment of letting agent fees on tenants, a reduction in maintenance relief, and, worst of all, the phasing out of higher rate tax relief on mortgage interest.
Taking this last point in particular:
- At the end of 2016, a buy-to-let property that earned £20,000 in rental income and on which the mortgage was £13,000 would incur tax on the difference between the two. Higher rate taxpayers would be liable to £2,800 in tax and be left with a net after-tax profit of £4,200.
- Fast-forward to 2020, and the tax is levied on the gross rental income. That’s a £8,000 liability. There is, however, 20% tax relief on the mortgage interest. The net effect is that the property investor is left with £1,600 after paying a total of £5,400 in tax. If mortgage rates rise, that profit could be wiped out.
Now, although you can’t control tax, you can control how you invest. In my recent series of blogs discussing ways to invest in UK property investment opportunities, I examined the pros and cons of investing directly, as partnerships, and as a limited company. Depending on your tax position and investment objectives, you may be able to mitigate most if not all the effects of lower mortgage interest tax relief.
You can’t control interest rates, but you can prepare for higher rates by allowing for them in your cash flow calculations. Prepare for the tax-grabbing HMRC by adapting how you own your investments – have a chat with one of our team, and we’ll discuss the options with you.
3. Get investing support
Whatever you do in life, it’s easier to achieve your goals if you get support. There are two types of support you need.
The first is from family and friends. They will be your shoulder to cry on if things go a little awry. They’ll encourage you and help you work your way through any difficulties. When things go right, they’ll be there to celebrate with you. This type of emotional support should never be underestimated. Listen to any speech given by award winners, and the first people they thank are those who offered emotional support.
The second type of support you need is professional. As you grow your portfolio, this support will come in the form of accountants, solicitors, mortgage brokers, and a property management team. The one constant should be your property mentor. I’ve got more than 20 years of experience in property, but I’ve not been in contact with my mentor. Your property mentor will offer you advice, help you with research, and is that arm’s-length logical view you need to assess the strengths and weaknesses of all property investment opportunities.
4. Organise your money
Taxes are only one piece of the financial puzzle in property investment. Get your finances organised, assess your portfolio at least annually, and make sure your contingency fund is ready to swing into action if needed.
Take control today to make money from tomorrow
There’s no time like the present to take control. It could be argued that the government has been lenient with property investors. After all, it’s given all of us three or four years to prepare for higher taxes on property investments. The savvy investors are examining their portfolios and considering their options now. New investors are doing the same.
The sooner you act, the better the outcome will be. My prediction is that as we approach 2020, there will be an explosion in the number of investors seeking professional help to switch their portfolios from direct ownership to partnerships or companies. The cost of doing so will rise, not fall. Having those conversations now makes sense on all levels.
Contact one of our team today on +44 (0)207 923 6100, and make sure you’re organised to take advantage of property investment opportunities and don’t let the taxman take advantage of you.
Live with Passion,
Brett Alegre-Wood
