There’s no denying it’s a buyer’s market, with opportunities for investors until at least spring, writes Graham Norwood in EG’s latest guide for private investors.
The figures tell the story. Halifax says the annual rate of house price growth fell to 1.5% in October – the lowest since March 2013. Meanwhile, HM Revenue & Customs reports sales in the first three quarters of 2018 were down by 4.1% on the same period of 2017.
For good measure, the National Association of Estate Agents claims the supply of homes on sale surged by 15% in September, while buying agency Quick Move Now says fall-through rates hit 28.3% in the third quarter of 2018, a rise of 5.2% in just three months.
These are classic ingredients of a buyer’s market, with most analysts suggesting this state of play will remain at least until Brexit is resolved in late March – or beyond.
“Bargains will be available. The regions will be less hard hit than London and lower-priced properties will be in greatest demand,” says Roger Lake, director of Auction House UK. “There is still a shortage of property in most of the UK [so] demand for rental stock will continue long term and property should remain a safe haven.”
The trick, of course, is for small property companies to find the right properties in the right areas. Experts highlight a number of opportunities to look out for.
Buy-to-let sales
Some landlords are quitting buy-to-let so an increasing volume of archetypal rental units (mostly two and three-bedroom flats in urban areas) are coming to the market.
The Ministry of Housing, Communities and Local Government says in the year to March 2017 – 18 months ago – private rental stock decreased by 46,000, since which time additional restrictions on landlords’ tax breaks have accelerated the sell-off.
“This is a response to the increase in costs that landlords face. Bills in January 2019 will include the first phase impact from the withdrawal of mortgage interest tax relief,” warns John Heron, managing director of mortgages at Paragon.
“Buying opportunities will emerge where there’s localised oversupply in the new-build market, where tenant demand is weak, or for schemes where Help to Buy assistance is unavailable” says Gary Murphy, partner and auctioneer at Allsop.
Contrary to popular opinion, typical buy-to-let flats on sale are not being snapped up by first-time buyers, who instead are drawn to new-builds offering Help To Buy incentives.
Instead, David Whittaker, chief executive of Keystone Property Finance, says most sell-offs by private landlords go to more professional investors with small firms. “Increased yields in some areas have mitigated the tax changes. As a long-term business plan with yields of 4.5% or 5% and mortgage rates about 3%, buy-to-let is still a good investment” he says (see table above).
Regional price cuts
As always, some regions offer more bargains than others.
Although price cuts are common across the UK – the property platform home.co.uk says its October market snapshot showed 16% of properties had their asking prices cut in the preceding 30 days alone – the biggest falls are in London.
Home says since the December 2015 peak, prices of apartments in Belgravia, SW1, and Chelsea, SW3, have fallen 19%.
“Time on market and stock levels are both rising in these [prime central London] areas and as long as that is the case, prices will be heading south” according to Home’s Doug Shepherd.
Within London some of the best bargains are new-builds as purchasers remain chastened by high stamp duty and, likely from 2019, a 1% to 3% surcharge for international buyers.
London Central Portfolio, a consultancy advising professional property investors, says new-build prices fell by 7.1% in prime London in September, while transactions are down by 0.8% over the past year to just 1,163. Across Greater London, new-build transactions are down by 13.6% in the year to October, despite Help To Buy being seen as a major incentive.
Such opportunities may not last much beyond the resolution of Brexit – if or when that materialises.
“Once certainty returns to the market we would expect prices to harden and harden quickly, as they did post-global financial crisis,” says LCP chief executive Naomi Heaton.
But you can look further afield for good value investment purchases too: Home.co.uk says South East England and East Anglia are catching London in terms of growing over-supply and accelerating asking price cuts.
Development
More ambitious investors happy to develop could consider converting non-resi to resi to take advantage of the eventual upturn.
Some commercial occupiers are vacating premises because of falling retail footfall and punishing business rates, while some outdated office buildings in secondary locations now benefit from permitted development rights – these allow residential conversion with significantly fewer onerous planning criteria than in the past. As a result, offices are often listed at residential auctions.
“Property companies are now looking to trim portfolios and even take a hit on capital values to avoid prohibitive costs with no certainty as to when units will be let,” says Auction House commercial director Stuart Cooper.
The trend is growing, with a record 2,452 applications to convert commercial to resi in England alone in the first half of 2018, predominantly in the southern half of the country, according to an analysis by Countrywide.
Lenders are considerably more flexible than before when it comes to this kind of scheme.
For example, specialist lender Octopus Property is one of a number to have revamped its resi bridging, development and refurbishment products because, it says, more investors are seeking to take advantage of cooling conditions.
“The real estate market continues to evolve, driven by both fiscal and regulatory changes as well as broader market uncertainty,” explains the firm’s head of sales D’mitri Zaprzala.
However, development opportunities are being viewed as too risky by many. “People in that market are concerned about land values and projected sales figures,” says Allsop’s Murphy.
“Prices in some areas and sectors are coming off, so there’s a feeling of ‘I don’t want to take the risk until I feel more confident in what is the end value of the product’. Whether you are converting a house into two flats or you’re building 300 homes, this is the question you are facing.”
Motivated sellers
For buyers of sites and investment units, auctions remain a popular starting point. Opportunities are likely to arise where a seller is very motivated. It can pay to focus on named sellers in an auction catalogue, such as housing associations and executors, which have a requirement to sell at a particular time rather than waiting for conditions to improve as a private seller might choose to do.
“So if the market is soft, it could be a bargain,” says Murphy. Conversely, however, those same assets tend to attract the most interest because everyone wants them.
In a buyer’s market the key rules – identify lots, check guide prices, sort finances, arrange a survey, and register with the auctioneer– are as before. But in addition, canny buyers often make an offer ahead of the event if they believe the vendor is minded (or needs) to accept a quick deal. For example, the results from the October online auction held by BidX1 show that six out of 46 lots offered were sold prior.
BidX1 chief operating officer Antony Schober says: “By placing a considered and realistic offer prior to auction, buyers are potentially avoiding a competitive auction scenario, meeting vendors’ reserve expectations and benefiting both parties.”
Most auction houses accept pre-bidding offers in writing right up to the date of the auction. If your offer is accepted you will have to be in a position to exchange contracts and pay your deposit immediately.
Increasingly, there are deals to be done post-auction too. Allsop, Savills and Strettons have all reported an increase in post-sale activity this autumn.
Strettons director Philip Waterfield says dealers are increasingly holding back in the auction room to see what is available at the end of the sale.
Allsop’s Murphy adds: “All buyers want to buy at the best price they can and drive a hard bargain afterwards. We know where the bidding has stopped and that will give us a clue as to where we can sell. There’s no doubt it’s a challenging market. There’s no normal.”
For investors, this may well be the perfect time to act.
