Is now the time to invest in residential?

In a totally unique climate, auctioneer Gary Murphy looks at the opportunities and risks for the smaller residential investor.

Residential property can be a great investment– particularly in the longer term. There are pitfalls at the best of times. But, against the background of an historic global pandemic, buying and selling decisions have become more challenging than ever. Most markets are cyclical. Values will rise and fall over time, often influenced by a range of factors. But they will always be underpinned by relative levels of confidence. Many people have made a lot of money from residential investment, often through good timing – whether by luck or judgment or a bit of both.

So when will be the right time to invest?

Savings rates are at an all-time low having halved over lockdown. The average one year fixed rate ISA pays little more than 0.5% compared to 1.14% in March this year. Property is a much higher yielding alternative with gross returns on assured shorthold tenancy investments at auction in 2020 ranging from 6.5% in London to 18.6% in the north-east (1). People will always need a place to live, whether that is through ownership or renting. Demand from both forms of occupation underpin capital values. Unlike commercial property, which is often less valuable with no tenant in occupation, residential property that falls vacant can usually be sold to an owner occupier with no drop in value. As a long term investment, residential property has performed well. In 1980 the average price of a home in the UK was £22,680. By July this year, this figure had risen to £241,000. As an asset class, residential offers the investor a ‘total return’ – capital appreciation (longer term) and an annual income from rental payments.

Buying unmodernised residential property (and there is a huge choice at auction) provides an opportunity to add value to your asset prior to letting. ‘Oven ready’ investments with tenants in occupation can often be purchased at auction at a small discount to vacant possession value – that is to say the price that might be paid by an owner occupier in the private treaty market after a more lengthy – and chain friendly – marketing period. We are now in recession. Adversity brings opportunity. With greater distress in the market there is likely to be a rise in the level of forced selling. No doubt there will be pressure on lenders from Government to exercise forbearance, particularly on owner occupiers. Investors may receive less forgiving treatment and consensual (or, more accurately, armtwisted) sales could become more prevalent – particularly by auction. The Bank of England base rate is currently the lowest on record at 0.1%. Whilst this latest reduction is an emergency measure, it is unlikely that there will be a rise until economic growth improves. That said, banks are cautious. Mortgage rates have increased on higher loan to value debt. For lower geared borrowing however, now may a sensible time to fix.

So far the residential market appears to have been defying the pandemic. Despite Britain’s economy having shrunk by a record 20.4% in the three months to June, average house prices have gained £30,000 over the same period. The property portal Rightmove reports that 38% more sales were agreed in July than over the same period a year ago. The paradox is a result of the release of pent up demand over lockdown, a release of stalled pre-lockdown purchases, a desire by some to change their lives post quarantine – whether that be through up- or down-sizing, divorce or relocation – and a rise in the level of stamp duty exemption from £125,000 to £500,000 to the end of March 2021 (although it seems unfortunate for buyers that cutting tax has resulted in higher prices.) But is this mini boom sustainable?

The furlough scheme will end on 31 October and there is likely to be a rise in redundancies from that point. Both capital and rental values are likely to be impacted. Existing investors whose tenants are in arrears will be aware of the Government’s stance on evictions. Greater protection will be afforded over the winter by requiring landlords to provide tenants with six months’ notice in all cases bar those involving anti-social behaviour and domestic abuse. These measures are likely to remain in place at least until the end of March 2021. Even those tenants who remain employed could try to negotiate discounts or rent payment holidays on renewal or perhaps mid-tenancy. Tenants employed in vulnerable sectors such as travel, high street retail, entertainment and restaurants will be considered as a high risk. Holiday and Airbnb lets may be affected by international travel restrictions – although such impact may be offset by greater numbers looking to staycation in the UK as a consequence. The tax treatment of buy to let investments is no longer landlord friendly. Since April of this year, the private investor has not been able to deduct any mortgage interest payments from rental income before paying tax. Now, the entire sum of interest paid will qualify for 20% relief.

For the first time investor in the residential market, it is very difficult to find that ‘one size fits all’ single purchase. Those who make a living from the sector know that a diverse portfolio – and a spread of risk – is the sensible course. Unfortunately, for the many with limited budgets, accumulation is a slow process. Working habits are likely to have changed forever since COVID-19. Most sectors are unlikely to return to compulsory full time office working. Consequently, we are seeing price rises in most areas outside of London. In particular, homes within commutable distance of cities and with outside space (private or communal gardens, balconies, or proximity to parks, etc.) will be increasingly popular. So too will those with space to work from home – studies, second bedrooms, annexes, etc.

Immediately accessible transport links will become less important. And with almost a third of all retail sales now transacting online (2), so too will access to shops. So it is perhaps no surprise that, of all the UK locations to choose from, London is the only one that is looking cheaper. Average house prices have fallen from £595,000 to £575,000 since mid-February. The highest rises have been seen in the north of England and Wales. There is little question that we are in for an interesting ride over the next few years. But whether this mini boom is simply a short term spike before a long term slump, I doubt. The love for property in this country runs deep and I would like to think that confidence in the sector is sufficiently robust to stave off significant falls. There will be a myriad of drivers at play over the next few years, most of them COVID-19 induced, that will alter how and where we live. As they say, there is nothing more certain than change.

Sources :

(1) Essential Information Group

(2) ONS

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