The banking world is in tatters and one thing that global property needs to get back on its feet - if not to flourish - is the cooperation and support of the banks. So, the property markets can't get back onto their feet until the banks recover, but, as the property crash was the largest contributory factor in the banking crash, the banks can't get back on their feet until the property markets recover.
The banking and property sectors may be locked in a mutually destructive vicious cycle, but unfortunately the banking sector is contributing to the failure of many other industries recovery efforts as well, so much so that the OECD warned in its latest Economic Outlook report that it could take up to 10 years to get through the current economic rough patch.
So why would anyone want to invest in such a costly asset as property amidst all this uncertainty? After all you are locked in to a property investment; it's not like shares that you can just get rid of if things go badly.
Sure, stocks and shares are more versatile, flexible and capable of making way more money. However, they are also capable of losing way more money and this is where property comes in.
Some would ask why bother investing at all? But that answer is simple: state pensions are no longer as reliable as they once were. Places like America don't have a state pension anyway and high street personal pensions have been crippled by the continual crashes of the stock market. So people need to save for their retirement.
Bank savings used to make about 6% per year in interest on a good account, but now they are making peanuts. At the same time thanks to surging inflation and currency volatility, cash is devaluing faster than it has for years. UK inflation came in today at 3.5%, while interest rates on savings are lucky if you get 1%, as they say, you do the math. Meanwhile high street pensions have been trusted for years, but as said above they lost almost all their value during the first stock-market crash and have since suffered further losses during subsequent stock market crashes.
So, people want to save for the future, but they are looking for something safer than high street (stock market based) pensions but that returns more than cash savings. Property investment is one of several avenues that are emerging as ticking both of those boxes.
Property is Safe
Done badly property is higher risk than stocks because of the high entry price, and it sure got a risky name thanks to all those investments gone bad as the crunch bit. But the truth is if you do the proper research (aka due diligence) then almost all the risk attached can be removed.
Research the vendor – Off Plan: do they own the land? Are they financially capable of completing the development without further loans or off plan sales? Have they completed any developments successfully? If so speak to some of the buyers independently, i.e. pay them a visit without any help from the developer.
Completed/Resale: do they definitely own the property? If not are legally authorised to sell it?
ALL: if the vendor is a company check them out at companies house and do some digging on them online, check their accreditations with industry bodies etc. If not a company, then you need go no further than completely verifying that they own the property they are selling.
Research the Property – Off Plan: do they have planning permission, and are they conforming to the plans they have permission for? Are they on schedule or have they hit a major setback? Check into applications for connection to water and electricity as investors have had problems here. Also, find out if any of the construction is being outsourced and go back to step one on any other companies involved.
Completed/Resale: have a thorough survey done, it is worth it?
Research the Market – Off Plan: if you are buying into a new development of flats for example, find out how many of the units have been bought by investors, if it is more than 30% you will be fighting for tenants. Find out time-lines for external infrastructure such as tube connections, and also make sure the investment is feasible if the completion of said infrastructure is severely delayed as frequently happens.
All: Other than that research supply and demand fundamentals by talking to letting agents, local tenants and anyone else you think is relevant depending on the investment.
Property Returns More than Cash Savings
You don't have to go far to hear reports about properties that make 30% per year in capital growth and earn yields of 12% net, even now – they disappeared in the wake of the crash but soon came back. The truth is 4% net is a good yield on a buy to let investment, 6% net is excellent, 4% is also probably a good guess on the average annual yield over the long term, with times like the present when demand is strong bringing 6% yields to make up for the slow years where you make 3%.
However, that is currently way more than cash savings are earning and it is only one part of the return a property brings. You also have the capital return and this is the best part. While you get your crashes like this one that sends prices down, over the long term property prices will always tend to grow.
Over the last 10 years UK house prices have grown by an average of 10% per year.
According to the Nationwide historical index the average UK house price was £1,891 in Q1 of 1952, compared to £162,722 in Q1 of this year. This is a growth of 8505% over the 60 years this is averaging growth of 141% per year. Since 1995 the average UK house price has grown by 218.5%, an average of 12.8% per year according to the same Nationwide index. Around the world a similar picture can be found with property prices always going up over the long term, in some emerging markets the growth is much sharper.
This makes property an excellent pensions investment because you have the regular income, which you can save or use, and then you have the nest egg(s) for when you retire, or you can keep living off the income. You need a lot of properties to make a comfortable retirement and that is why people are starting now.
So yes, property investment is a wise choice in the current climate, if you do your research.
- Thursday 07 June 2012