April marks the start of a new financial year, but in April 2020 things will be a little different, courtesy, of course, of the coronavirus pandemic. For property investors, the outbreak takes us into new territory; a period when most valuations are on hold, mortgages are being withdrawn and physical viewings simply aren’t happening.
Against this backdrop, one might expect the property investment sector to have come to a standstill. However, as our investment advisor Jason Guest reports, there is still plenty of movement in the market, and a lot of it comes down to the availability of cash.
Q. So, Jason, you’re saying that sales are still happening despite the Covid-19 pandemic and all the restrictions that go with it?
Yes. I wouldn’t pretend for one moment that it’s business as usual, but it’s certainly true to say that we’re still making sales and taking new enquiries. Every day, we’re getting lots of questions from people; a combination of new investors and existing landlords.
Everyone recognises that these are unusual times, and we’re actually busier than usual answering people’s questions. The majority of the customers we talk to are well aware that things are changing fast, but we’re not seeing any loss of faith in property as an asset class; it’s just that in most areas, transaction rates are slowing. That’s partly for practical reasons, such as not being able out get out to view potential acquisitions, but some investors are also just holding off on any big spending decisions and waiting to see what happens. In the meantime, many of them are researching locations and investigating financial products, and in some cases, they’re starting to consider different ways of building their portfolios.
One reason I say that is because off-plan properties are getting a lot of attention at the moment, and that’s probably because of the way they’re marketed. Buying off-plan means exactly that; no one expects to be able to wander round a suite of fully furnished properties before making a decision. Buyers accept that they’ll be judging on the strength of drawings, technical specifications, visualisations and so on. These are all still perfectly viable options during a lock-down and that’s where most of the activity now seems to be taking place.
Q. Presumably, this isn’t the usual pattern of activity you’d expect to be seeing at the start of a new financial year?
No, it isn’t. Normally, the market is affected more by traditional economic and political factors, such as the last General Election result, which started a surge in new purchases and led to much faster price growth than we’d seen in months. If it hadn’t been for the pandemic, we’d have expected to see continuing growth in the housing market – more transactions and steady price gains – and we’d have expected that to be happening across most residential property types.
The fact that it’s a new financial year isn’t a major factor but it can motivate some people to start investigating different investment options. April is a time when people think about things like tax allowances, ISAs and so on, and against alternatives such as savings accounts and bonds – which are still looking woeful, with interest barely exceeding the rate of inflation – property generally offers much better returns. That unusual combination of capital appreciation and rental yields makes is a lot more appealing than the sub-2 percent returns that you’ll see on most savings accounts.
But to answer your question more directly, no, this isn’t a typical pattern. It has definitely slowed activity and we’ve seen a shift in the sorts of investment that people are considering. In particular, I think what we’re witnessing is a marked shift towards cash purchases, and there are probably two main reasons for that.
The most obvious is that mortgages have suddenly got a lot harder to find. Lenders have withdrawn many of their products - and for good reasons: it’s very difficult to lend against a sensible valuation if you can’t get your surveyors out there in the field. You might be able to get a fair sense of local market values by looking over recent transaction data within the same neighbourhood, but usually, that’s not going to be enough for a responsible lender to work on.
So, with fewer mortgages being available, it’s logical that more of the transactions that are still going ahead are going be cash purchases.
Q. You said there were two reasons for the higher proportion of cash purchases. What’s the other?
Overseas buyers. The value of the pound has fluctuated since the coronavirus first hit our shores, and many foreign investors have recognised this as an opportunity to use a beneficial exchange rate to secure a bargain. Typically, these will be either wealthy private buyers or institutional investors who are managing large pots of money. In either case, they are able to make an outright cash purchase rather than relying on credit.
The appeal of British property is easy to see. Firstly, there’s a long-established under supply of housing, which is well known to overseas investors. They appreciate that with so much demand and such a restricted supply, average values are likely to do well in the long term. They’ll also have done their research and seen that there are some really strong yields achievable in many towns and cities across Britain. They’ll have shortlists of destinations to consider, not just in the UK but across the world, and you can bet that places like Manchester and Birmingham will be on there.
Living here in the UK, many Britons can lose sight of what an unusually rewarding property market we have. There are opportunities in other countries, of course, but there’s a good reason why so many investors from China, Europe and America decide to invest their money here. We have a comparatively strong economy, a stable democracy and a market that has been on a clear upward trend for decades.
Q. So is the exchange rate making a big difference? Are the same opportunities as attractive for UK investors who are in a position to make a cash purchase?
The exchange rate is making a difference, yes, but it’s not one we should overstate. I think it’s fair to say there’s often a spike in foreign property investments when the value of the pound goes down, but that’s not the only time that foreign investors buy. There’s almost always a steady flow of purchases by overseas buyers. It happens pretty much all year round.
The difference that the exchange rate makes to their returns on investment won’t necessarily be huge. It really comes down to individual currencies and their comparative values at any given time. If the pound has fallen against another currency, that creates a window of opportunity for foreign investors; it gives them an advantage because their currency buys more pounds, so their dollars or euros have proportionately greater value. If they can but at a time when their currency gives them, say, a 2% advantage, then that translates into a decent saving on the purchase cost, and it will ultimately mean better yields.
In that sense, it isn’t a level playing field for domestic and foreign investors, but nor is it static; exchange rates are changing all the time and they can move either way, for or against you. Looking back at last month, for example, the pound fell to just over $1.14 on March 19th, down from $1.31 on 9th March. Look at that on a yearly graph and it looks like Sterling fell of a cliff, but by 1st April it had recovered to $1.21. Timing it badly could be expensive.
This illustrates a key problem with currency markets. Like stocks and shares, values are changing all the time, and those changes can be quite pronounced. It makes these markets a volatile choice. To be realistic, exchange rates are always going to be changing and trying to use them to gain an advantage takes you into a kind of speculative investment that is more focused on short term wins. That’s not playing to the strengths of property investment as a whole, which is much more about strong, steady, long-term rewards, and trying to keep risk to an absolute minimum.
And that brings us to the gist of your question, which is about how attractive the UK residential property market is for domestic cash-buyers. Setting aside exchange rate variations, the only reason that foreign investors buy British residential property, as opposed to property anywhere else, is that they believe it will perform well in the long term. A brief fluctuation in currency values might give them a welcome bonus, but they wouldn’t invest for that reason alone. They are investing because a) they expect capital values to rise over time, and b) they expect to see healthy and dependable yields.
So, the simple answer to your question is that everything that attracts foreign investors to British residential property applies equally to UK investors. In the long term, property here has always tended to perform reliably and it has delivered solid returns. Despite Covid-19, and despite the expectation of a downturn in the global economy, most forecasters expect British residential property to continue appreciating over the next five and ten years. Their predictions vary but Savills, for example, is sticking by its November house price forecast, and thinks that average values will rise by over 15% between 2020 and 2024.
No one can be sure what the present economic challenges will do to tenants’ ability to pay rents in the next year or so, but we can be sure that demand will stay strong and that supply will remain low. These are fundamentals of the market and their combined effect is to maintain strong rental demand. They won’t be changing any time soon.
Q. Okay. Let’s say an investor has cash available. What are the pros and cons of a cash-based investment?
One important feature of a cash investment is that some properties can only be bought with cash. Some developers with off-plan projects will only sell to cash buyers, and in some cases – most notably small student flats – it’s pretty much impossible to get a buy-to-let mortgage. So that’s a clear-cut advantage: cash will let you buy into investments that aren’t available to other people.
Currently, of course, the withdrawal of many mortgage products and the social distancing rules mean that buying with credit is much more difficult generally. If you have cash, you’re in a position to act at a time when most others aren’t. If vendors are particularly anxious to sell, that could put you in a good position to secure a bargain.
In financial terms, buying with cash means you won’t have to factor mortgage interest payments into your monthly outgoings so, on the face of it, that’s another advantage. However, that cuts both ways, because buying outright does mean you can’t take advantage of leverage.
We’ve covered the principles of leverage in a previous Residential Estates blog, but basically, it involves getting a higher rate of return by using borrowed money. Let’s say you put a £50,000 deposit on a £250,000 property and borrow the rest, and then the property gains 4% in value over the next twelve months. It’s now worth £260,000 – a gain of £10,000. As the property owner, you benefit from 100% of that increase, the full £10,000, despite only having contributed one fifth of the original cost. Your £50,000 has earned you £10,000 of capital appreciation in that first year – a gross return of 20%, rather than the 4% you’d have seen if you’d bought outright.
I’m paraphrasing an illustration that we used in our ‘50 Things to Consider’ blog post but I hope the point is clear enough. Leverage makes your money work harder, and borrowing allows you to spready your money across a wider property portfolio, so despite the fact that you have to pay mortgage interest, using credit can sometimes produce better overall returns.
That’s just a generalised point, of course, and it won’t always be true. As ever, you need to consider property investment opportunities on a case by case basis. Leverage works well when property values rise but it’s not so much of an advantage if price growth slows. On the other hand, a cash purchase will always keep you insulated against concerns about interest rate rises. If you have the money available, it can be a passport to a more predictable investment and sometimes, as it is now, cash might be the only way to secure the property you want.
Q. Thanks Jason. Do you have any final words for potential investors who may be wondering how best to use their cash?
I’d say the best thing to do right now is to remember the basics. Judge every opportunity on its merits and try to take the long-term view. Don’t let the current pandemic shape your thinking too much. Don’t imagine that it’s here to stay but, equally, don’t let it make you feel rushed into making a snap decision.
Think about the % return on a cash investment – even with going concerns we can achieve a 8-9% NET return and that cannot be achieved in a high savings account, and on the stocks and shares market it would be considered a high risk strategy, whereas property, and cash investments are generally low risk, low hassle with good yields. With cash investments just having one variable, which is rent paid versus the property price.
There are good opportunities out there right now, and there will certainly be vendors who will be keener than ever to sell, so keep your eyes open for attractive deals. And off-plan developments continue to be attractive, especially those that come with rental assurances because they’ll ensure that you get your promised return, regardless of occupancy.
The coronavirus won’t slow things down forever and new properties will hit the market as soon as the pandemic passes. In the meantime, my advice would be to keep an open, analytical mind. Whether you’re planning to buy with cash or credit, there are always going to be opportunities.
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