UK swings to buyers market

By Rod Thomas, CEO

19 May 2008

When markets get difficult and jumpy, I start rubbing my hands in the sure knowledge that there are going to be some bargains to be purchased. It’s the amateur investors that lose out, and the pros that win every time.

We hope that all Axis members act like Pro’s. To be honest, if you don’t you shouldn’t be investing at all. And as a Pro, I’d like to give you my take on the current UK situation and our analysis of what action investors should, or shouldn’t be taking.

Let’s start with a quick analysis of the current situation…here’s my key bullet points

1. The supply/demand situation hasn’t changed. We still need more property for people to live in. Either to buy and rent.
2. With the current situation developers are reigning back and the current housing shortfall is going to get worse. We reckon that in 24-48 months there will be a severe shortage which in a free market means only one thing – higher prices.
3. The current difficulties are caused by two problems – the Bank of England forcing interest rates too high too quickly – now thankfully reversed. And, of course, the US sub-prime crisis which has had world-wide repercussions
4. Property runs in cycles, and interest rates run in cycles. For investors looking long term, short term changes in cycles offer buying opportunities rather than reasons to stay out of the market. It’s a brave person who can read the bottom of a market – almost always you are past it and on the way back up before you know what’s happening! Then it’s too late for the best bargains.
5. What has happened is a significant tightening of lending, both for owner occupiers and for landlords. This manifests itself in these ways:
   1. Lower valuations from the RICS certified valuers. We frequently see down valuations now that bear no relation to the current realistic sales price.
   2. Higher mortgage rates
   3. Lower LTV percentage – some lenders will now only lend at 75% rather than 85%
   4. Greater restrictions on eligibility – some lenders will only do BTL mortgages for “experienced landlords”.
   5. Higher rental cover requirements – we were down to around 100% cover with many lenders, now this is back up to 125% in a number of instances
   6. Many BTL lenders have simply withdrawn from the market – if they don’t have access to wholesale money at realistic rates then they simply can’t lend. Quite ridiculous when the world is awash with cash but no-one will lend it to each other!

What does all this mean for investors looking at UK property?

Firstly it means that far fewer deals actually stack up. But when they do you can expect…

Very significant discounts. 20% is now the baseline and 25% increasingly common

Higher yields to get the required rental cover. A year ago we thought 5.5% yield was good. Now 6.5% is around the minimum

There are still good mortgage deals to be had provided the deal stacks up – which means that astute landlords can buy at exceptional prices and with yields that haven’t been seen possibly for 10 years.

To sum up we believe that there is a window of maybe 12 months to snap up the best bargains. Once developers clear current stock they won’t be so willing to discount so heavily.

And once the market shows signs of recovery, the discounts will reduce overnight. No developer likes giving away 25% of their sales value – basically it means selling at cost or even at a loss. So they won’t do it a moment longer than they have to.

My summary – if a deal works now, in this difficult environment, then it is a fantastic deal and snatch it whilst you can.

Making The Most Of Today

To benefit from these exceptional opportunities investors need to be ready to:

1. Act very quickly. In particular, our financial services company needs information back immediately. Delays on your part may mean that the mortgage deal has been withdrawn and the deal is off. We’ve seen investors lose cracking deals simply because they have been too slow.
2. Be prepared with some cash. To make the best deals work you may need to put a little cash into the deal. Say from £5K to £25K depending on the project. This will be a sound investment decision – you’ll be getting a very high level of equity and buying into a development very cheaply.
3. If you haven’t got a top quality credit rating, sadly you are unlikely to get the best rates, or even an offer of finance at all. This is not an environment where sub-prime borrowers are going to get financed. It’s worth checking your credit record as mistakes are frequently made and it would be a pity if you were not approved through no fault of your own.
4. Ignore the doom mongers. Property is always going to be a blue-chip investment. Maybe it could lose a few percent in the UK. So what if you have locked in 25% saving. The UK is not, in our view, in anything like the same situation as the USA for multiple reasons to go into. Bottom line is there is not enough space on our small island to build what is needed. The USA doesn’t have that issue with supply/demand much more in balance and therefore pricing more likely to be affected by the economic situation.

Overall – watch out for some cracking deals over the next few months. Be prepared to move quickly and lock away in your portfolio some of the very best deals you are likely to get for many years.

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