Earlier this week we were joined by Residential Estates' investment advisor, Jason Guest, giving us his insight into property market investment in the current climate. Like most of us, Jason predicted a sharp downwards turn in property investment, but last week he revealed potential for a sustained recovery and this week he shares his insights as to why property might still be a good investment.
Q. What changed your mind about the future of property investment?
It’s really just a combination of our own experiences and what everyone is seeing happening on the ground. There have been lots of recent reports of a post-lockdown bounce in property sales and an associated boom in prices. We’ve heard that reported by Zoopla in its May 2020 House Price Index, and by Rightmove in its June Price Index, both of which have indicated huge surges in activity. Zoopla has said that prices have risen by 2.4% since early March, and Rightmove’s figures are pretty similar, suggesting average price gains of 1.9% over that same period.
A couple of weeks ago, Knight Frank reported that it had its ‘best ever’ week for sales and that it was seeing the highest-priced offers on record. Rightmove said something very similar, talking about its busiest ever 10 days in May and June. I certainly wouldn’t have expected that if you’d asked me for a prediction back in April or early May but since then, we’ve seen the same pattern ourselves. We have had, without any doubt, two record months. It was the busiest May we’ve ever seen, in terms of both enquiries and actual sales of investment properties, and it’s been the same for June.
I think the reason for it is similar to the reasons for the other big spike that everyone saw in January. The General Election was over, people had been waiting to see the outcome, and suddenly there was a release of all those potential buyers who’d been biding their time. The second time around, it was the lockdown that caused that big build-up of pressure. Viewings had been put on hold; people couldn’t get out to solicitors – the whole industry basically just stopped for a while. But the demand hadn’t died off; it had just been building, and when the market re-opened, it did so in a really big way.
Q. But a big surge in activity isn’t necessarily evidence that property is still a good investment…
No, that’s true, and in fact, a lot of the extra demand I was talking about there – demand on a nationwide scale – that’s been coming from private buyers rather than investors. But I was still coming to the heart of your question. The point I wanted to make was that a lot of people were expecting an almost immediate drop in prices, in rental values, and in market activity generally. The logic was that people would have less money and they’d be a lot more cautious about big spending decisions, so the impact would be felt in the immediate term.
As it has turned out, that hasn’t been the case at all. Bricks and mortar have stayed very much in demand. Part of that is because there is still a massive difference between supply and demand. Housebuilding has consistently failed to keep pace with demand for new homes and now, as a result of the pandemic, construction work has slowed even further.
Whenever demand exceeds supply, prices tend to go up, and that’s one of the fundamental market forces that has been sustaining house price growth for years. In that sense, nothing has changed. In fact, Covid-19 has only amplified those differences, so for investors hoping for long-term capital gains, that’s one factor working in their favour.
Looking at some of the big lenders and national estate agents, there seems now to be an expectation that average house prices will continue to grow for the time being, but that they will start to slow and/or contract towards the end of the year. That’s the view of Zoopla, for example, which is forecasting growth of between 2% and 3% over the next quarter before the market starts to slow and fall back in the final quarter of the year. At that point, various industry commentators and agents are predicting short term falls of anything between 2% and 10%.
Over the year as a whole, most investors should still be benefiting from their usual rental yields of course, but there’s no real consensus over how quickly average values will recover after any dip. Ultimately, so much depends on the extent of any economic recovery. But it’s important to remember that property investment is a long-term business and unless you’re actively planning to sell near to the end of this calendar year, capital values are less of an in immediate priority than yields.
It’s probably fair to say that 2020 won’t be breaking many records when it comes to investors’ profits, but I think it’s shaping up to be a lot better than many first feared and in our opinion investing in property is still absolutely worth it.
Q: But eventually, all this economic inactivity has to have an effect, surely? And if so, what happens to the property market then?
Yes, I’d agree it has to have an effect. Such huge changes can’t just be brushed off. And one important consequence, I think, is that there are bound to be job losses. Some people who have been regularly paying their mortgages or rent won’t be able to keep doing that. Mortgage holidays and leniency on the part of lenders can only take you so far and then something has to change.
For investors, that could translate into a number of potential problems. Non-payment might be one; another might involve tenants moving out in search of somewhere more affordable, such as into social housing. In other cases, there might be tenants who can just about manage to keep up their payments, but they certainly won’t have the capacity to absorb any rental increases. So, demand could fall and it may be harder, for a while, to sustain rental price increases. Those could hurt profits until things start to improve again.
The other consequence might be a general slowing in house price inflation. With less money in the economy and less money to spend, house-buyers won’t have as much freedom to compete for the homes they really want. That could constrain growth at about the same time that these other negative factors start to kick in.
So, in truth, I think there will come a time when things start to get hard for property investors, and that’s probably going to happen towards the end of this year.
Q: And how long do you think those difficult times could last? You talked before about seeing a ‘fairly strong and sustained recovery’.
That’s a very difficult question and there’s only so much value you can put on one person’s predictions. I don’t think I would want to put a specific timescale to it; I’m thinking more in terms of the underlying market forces and what they suggest about the long-term direction of the market.
I mentioned earlier about supply and demand. The charity Shelter estimates that the country needs to build about 164,000 new homes every year to keep up with the demands of an ageing population. The reality is that we’ve always fallen well short of that and this year, as a result of Covid-19, Shelter is suggesting that we might see as few as 4,300 houses going up. That’s an incredible shortfall and it’s going to see a further widening of that gap between supply and demand. It’s a powerful force that just isn’t going to go away, so whatever else happens, that will always be there, working to push prices back upward.
There are other factors, too. For example, the same job losses that might force tenants to move out of rented accommodation could also force struggling homeowners to sell up and rent instead. On top of that, there will be the relationships that break up as a result of months of close proximity during lockdown, and that could also push up demand for rentals.
The bottom line is that property remains a scarce resource and there are always likely to be lots of potential buyers and tenants competing for it. So that’s one part of the reasoning why I think the housing market is destined to recover and that the property market is still a good investment.
Another is the hope that the government’s attempts to prop up the economy help to stave off the worst impacts of the lockdown. There has been general approval of its financial support for the furlough scheme and help for the self-employed. Those have been lifelines that have helped a lot of people and encouraged employers to protect countless jobs. As the lockdown eases, I’d hope that we’ll see a swift revival of business activity and consequent new job creation.
That recovery could potentially be accelerated if the government delivers quickly on its promise to spend around £5 billion on infrastructure projects such as roads, schools and hospitals. Any public spending will put money back into communities in the shape of workers’ salaries and contracts with supply chain businesses, so that will go some way to stimulate growth and jobs. Admittedly, these aren’t vast sums – less than a quarter of one percent of GDP – but at such a challenging time, any such measures have got to be welcomed.
Q. But, to be realistic, we’re expecting challenging times ahead and we have no clear idea when things will improve. If all that’s true, then why is property a good choice for investors?
Well, for one thing, you have to find some sort of home for your money – some vehicle to make it work – and, at present, the other options are looking very shaky.
The challenges in today’s housing market aren’t caused by any inherent weakness in the sector itself; they stem from wider problems in the national and global economies. By contrast, stocks and shares are inextricably tied to economic performance, so they’re very volatile and difficult to predict at the moment, even for seasoned professionals. Businesses haven’t experienced this sort of challenge for generations so, for ordinary people, the stock market is looking like an absolute minefield.
If you want cast-iron security, then savings accounts and bonds are about the most risk-free options, but with so many of them paying less than the rate of inflation, any money deposited there will actually be losing value. At a time like this, people will surely want their money to be working harder than that.
There’s commercial property as another option, of course, but the lockdown has suddenly made that look very vulnerable. Right now, countless factories, offices and hotels are lying empty as a result of social distancing, so returns this year are likely to be unusually poor. Longer-term prospects are looking worrying, too. Market demand could shrink if too many tenant businesses collapse as a result of the lockdown, and it could contract still further if we start to see nationwide changes in behaviour. The lockdown has proved that many employees can work perfectly well from home, so business owners and shareholders might well start to change their thinking about the necessity of maintaining expensive offices. Why spend all that money if it’s an avoidable expense?
By contrast, demand for residential property is only going to grow, and that growth is essentially unstoppable. It’s based on demographic factors such as age and population, not on the vagaries of the economy. Consequently, I think we might even start to see a re-purposing of some properties; a rise in office-to-residential conversions as developers and property owners look to capitalise on more dependable sources of demand. Ultimately, everyone needs a place to live, so whatever else happens in the economy, that’s one factor that is always going to work in property investors’ favour.
To summarise: if we’re discounting savings accounts on the basis of their poor returns, and discounting stocks and commercial property on the basis of their high risk, then what’s left? Residential property remains one of the few credible alternatives. Its ability to earn a solid rental return, together with the prospect of longer-term capital gains, is actually quite rare.
I think that’s a key reason why we’re seeing such a surge in investment demand right now; other options are looking distinctly unattractive, but the fundamentals of the private rental sector still look very strong. If you’re planning for the long term, property investment is still a solid choice.
Q. Thanks Jason. Do you want to add any final thoughts?
Only to point out that I’m talking here in very general terms. I haven’t talked about differences in market conditions between different towns and cities or made any comparisons between different types of rental property. These are all important considerations and it’s vital to get all those details right. Not every property investment will be a winner, especially in such a unique economic climate as this.
I say this a lot but before committing to any big decision, it’s essential to take advantage of all the information and research you can get – and to choose an investment that matches your own particular goals and circumstances. So, seek advice, study the details and take your time to make the decision that’s right for you.
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If you would like more information about any aspect of property investment please talk to one of our professional advisers. Call us today on 01244 343 355.