Top-down property research explained
If you were investing in a stock market fund, you would expect the fund manager to have conducted some in-depth research before buying shares. You would expect the underlying fundamentals to support the long-term growth of the stocks that are being bought and put into your fund. The last thing you’d expect is for the fund manager to select stocks by putting a pin in a list of companies. Though, to be honest, with around 80% of all managed funds underperforming their benchmarks, they may as well use the latter method of stock selection.
When you invest in property, you must make sure that you do your research (or due diligence) properly. In this article, you’ll learn about the due diligence framework that we use to uncover the best places to invest in property UK.
Top-down property research explained in a nutshell
We use what is known as a ‘top-down’ approach to residential investment property research. This means we start with the big picture and drill down to the fine detail. As we do so, we learn more about the area and the property and the potential for it to produce valuable long-term investment returns.
Many years ago, property research was highly labour-intensive. It took days and weeks to find the information you needed to make a fully informed decision. Today, the internet has simplified the whole process. Almost all the information needed can be found on the web, though some needs particular subscriptions and some are paid for.
Even though a mountain of information is freely available online, I still suggest that you do some hard graft. A little legwork will take you a long way. You’ll need to telephone local property professionals, rental agents, estate agents, etc. You should also visit the area, development site, and property (though if you have a trusted colleague nearer, you may be able to get them to do this for you). Overall, I now conduct about 80% of my research online, and the other 20% in person.
Since I first entered the property world in 1994, I’ve been building up my own customised list of questions that I think need to be asked before committing to buy a property. This is what the professionals call ‘due diligence’.
These questions, broadly speaking, fit into four key areas:
1. Macroeconomic factors
This is the big picture. We look at the state of the economy, the housing market, and assess where we are in the property cycle. We’ll look at both national and local elements, searching for evidence of governmental or local authority investment (roads, rail, airports, schools, other public buildings and amenities, etc.). We’ll ask questions about the supply and demand sides of the property market, again at national and local levels, and make an assessment about the state of the economy: will the area and economy support the investment goals of income and growth?
2. Microeconomic factors
At this next stage, we are concerned with the local area only. This is where we really become involved with the area in question, examining in more detail those infrastructure plans. The types of question we ask now include:
- Is local authority development being supported by private development?
- Are schools and colleges helping to build communities, and is local business thriving?
- Are there shopping and community facilities to encourage money into the local economy?
We’ll look at local demographics, review crime rates, and consider average wages and credit ratings. If you know where to look, all this information is available while sitting at your computer.
We do this to acquire a deep understanding of the area in which we’re considering an investment, and to also learn what type of person may want to live there. In other words, does the area have a rentable value?
3. Development specifics
We now examine the development itself, looking at a broad range of factors. These include size and design of the property right down to minutiae such as the standard of work, floorings, fixtures and fittings.
Also of concern is the developer itself, and here we’ll be looking at the track record. If the developer is one with whom we’ve worked successfully before, all the better. If the property being considered is a pre-existing home, we look at levels of maintenance previously undertaken, consider ground searches, compare to rented properties of a similar type nearby, and examine any plans for the area that might adversely affect the property going forward.
4. Portfolio-specific
Finally, we want to know how the property will fit into the investor’s overall portfolio. We want to know that it complements existing properties and that it won’t drain resources that might be needed elsewhere. Specifically, we want to know if the addition of this property will aid in the development of the portfolio, providing the income and/or capital gain to do so.
Does this model work for all residential property investment?
The short answer to this question is yes. It’s the framework that we have used to source hundreds of millions of pounds of property in the UK, Europe, Asia, and Australasia. This approach works equally well if you are researching an area for a property or an area in which you have identified a potential property investment.
However, the exact due diligence will vary from person to person, property to property, area to area, and country to country. For example, your portfolio and investment goals will not be exactly like those of another investor. Therefore, it’s not a one-size-fits-all model, but it is a research framework that works for all.
When we select properties for their investment potential, we undertake extensive research into the potential to produce the best long-term return. To discover how our research methods could help drive your investment success, contact Gladfish on +44 207 923 6100.
Live with passion
Brett Alegre-Wood
