It's a great investment, right?

All too often are those words spoken... "it's a great investment, right?"

"Well, buying a new build is hardly going to give you the best rental return, let alone capital appreciation..."

"But it will go up eventually right?"

That is true... property, most of the time, appreciates if you give it long enough. Time to revisit a nifty article I wrote a while back (High Yield HMOs vs Low Yield New Build) to dig up a graph that I made to demonstrate this exact point. The point being that you pay for the "shiny factor" in the new build, or newly refurbished home. 

Now there could of course be a multitude of reasons to buy a new build or newly developed property. Time is the primary one of course. Those with busy jobs cannot afford to invest the time into sourcing new bathrooms, flooring, paint, dealing with tradesmen and so forth, that much is true. Money is another. In the case of first time buyers using the help-to-buy scheme they can only take advantage of the scheme when the property is eligible (it must be new build and the developer must be registered with the scheme). So we've identified a few caveats where it is not perhaps not feasible to buy an older style property (leaving aside personal preference as Victoriana is not everyone's cup of tea of course).

So how do we calculate how good an investment is? Normally there would be metrics we can use such as Gross Yield (annual rent divided by purchase price) or Return on Capital Employed (more applicable when you’ve added value and refinance to represent how much return is made on the money left in the deal. In our hypothetical scenario we are adding time and effort into the mix though. How do we calculate that? Well if you are a homeowner it goes without saying that you will, at some point, have to put in some time and effort to carry out (or have carried out) repair works to the property you live in. Something, at some point, will break and you will need to call a plumber, tiler, electrician or some other trade professional. So aside from routine maintenance what about improvements works? Installing a new bathroom is considerably more time-intensive because of choices that need to be made - design, colour, you name it.

Back to our analogy. New build - 0 time/effort choosing bathrooms and kitchens, it’s already A* quality. Older style property doer-upper - considerable hours pouring over bathroom designs and the like. The temptation is also rather high to overspend with this sort of thing because you want to make it “just right.” So how much do you value your time? To see the real trade-off between the two you can’t just compare purchase price against what it would be worth in 5/10/25 years, but how much time and effort you spend updating/refurbishing/maintaining it. Same goes for the exterior. Although by and large a new build developer will appoint some kind of managing agent this is of course an expense that you, as the leaseholder, will need to bear. The time spent maintaining the outside is outsourced, so you are paying for someone else’s time. I would argue that if you are going to buy a property and hold it you are planning to hold for the longer term, 15-25 years. in that space of time you would expect to have to carry out some form of work, be it bathroom/kitchen or maybe even a roof repair. I would therefore wager that less time is spent upgrading and repairing a new builds style property; this is however reflected in the returns over time (see graph).

So which is the “best?” Well that still very much depends on how hands-on you want to be. New build is certainly less involved from a repair and upgrading perspective, but if youdon’t mind the odd repair or upgrade then you can’t beat an older style property, they have always done better over time in terms of saleability (less identical supply on the market at any given time) and have lower fixed outgoings on the whole in the form of service charges, ground rents and the like. So from a purely investment point of view I would have to lean towards an older style property from an appreciation point of view. Is an older style property suitable for everyone? No, one size doesn’t fit all - which is right for you? Bear in mind however that there are better vehicles out there than new build properties - the yield is likely to be in the region of 3-4%; better returns can be made by working together with a property investor to leverage their skill and expertise and employ the money into a bigger, more profitable scheme rather than become a landlord yourself. I for one am working with a few bigger developers in order to accelerate my returns. If you’d like to hear more then by all means drop me a line and start the conversation. 

New Home Building in Clapham and Lambeth over the last 10 years

Should you, as a landlord for buy to let or for personal occupation, buy a brand-new home?
Well, let’s start by looking at the numbers …

Over the last 10 years, 3,715 new homes have been built in the Lambeth Borough

That is a lot of bricks and mortar! Roll the clock back twenty years in the Clapham property market, and there were two distinct camps of property buyers - folks who would only contemplate living in period character properties with their original fireplaces and beams, and those people who preferred the low maintenance of a new home. Old period homes were ridiculed as money pits by new-home aficionados, while new-home owners were accused of buying boring boxes, all vanilla, all the same, homogenous and bland.

However, it’s not as black and white as that anymore – or not as I see it in Clapham. New homebuilders are now trying to change their cookie-cutter uniform rows of suburban boxes into developments that are as individual as the families that love in them, thus increasing their appeal. Nonetheless, whether you choose a stone cottage, archetypal Victorian semi or terrace, 1970’s/80’s functional home or a untouched new home, whatever home you buy, it can result in supplementary costs that are often not taken into math’s when buying by potential homeowners or buy to let landlords.

So looking at the numbers in greater detail, let’s see what type of new homes people have been buying in Clapham and the wider local authority area ..

I thought the mix of what was built/bought locally over the last 10 years when compared to the national figures was fascinating … it’s interesting (but not surprising) to see a greater proportion of flats built locally and fewer detached and semi detached homes being built, when compared to the national averages. This is because of the nature of the Clapham area, its position in the country, the availability of building land, planning restrictions by London Borough of Lambeth Council and the price of building land.

So, should you buy a new home (because a lot of people locally have over the last ten years)?

Well if you are considering new, take care when buying one, as often the show home isn’t the actual property you end up buying. It’s like visiting the car showroom and falling in love with the model in the showroom (which is spec’d up to an inch of its life) – only to get the base model when handed the keys. Look out for things like curtain rails, tv aerials (or lack of them), kitchen appliances, carpets and curtains … and outside – make sure you aren’t unwittingly buying a square piece of earth instead of the manicured landscaped gardens.

New homes are a lot more efficient on energy consumption compared to the old drafty, high fuel bill Victorian semis, as their owners can testify. Older properties will have maintenance issues, with 100yo brickwork and roofs that might need replacement and extra insulation, rotten wooden windows and a dodgy central heating boiler (all sounding rather a strain on your bank balance if you weren’t aware). The point I am trying to get across is open your eyes and don’t assume .. ask questions and get a surveyor to make a detailed inspection of the property so you know what you are getting yourself into.

Next, I also wanted to break down the new home stats to each individual year in our local area to see if there was a pattern to when people bought a new home. As you can see, there was a drop in new homes selling around the Credit Crunch years (2009) and since then; the general trend has been better! Looking at the much larger second hand housing market in Clapham over the same 10 years, the coloration between the new homes market and second market has been quite strong – which shows the new home builders don’t make (or break) the Clapham housing market – just follow it (although with the planned building locally in the next 10/20 years – who knows if that will continue to be the case?).

So, should you buy brand-new or second hand? If price is your sole motivator, then new homes are always CHEAPER when the economy is bad. However, in normal and good housing market conditions, you will pay a ‘new build premium’. The Royal Institute of Chartered Surveyors admits that this can be as high as 10% extra, when compared to a similar second hand property – so be aware of that (it’s like paying extra for a new car and losing a bit (or a lot) of money as soon as you drive off the forecourt). Although, it’s not always about pure pound notes.

Older houses are bigger (more room) yet take more money to heat. Older houses have bigger gardens (to enjoy) – but you will spend more time tending to them. Older houses are in more established areas (with more facilities), whilst everyone is starting afresh on new homes. It all comes down to personal opinion. One final thought though, at least with new homes there is no gazumping or no upward chain to ruin any sale completion dates …

The choice as they say … is yours!

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Nine Babies Born for Every New Home Built in the Past Five Years in Lambeth

9 babies have been born for every new home that has been built in Lambeth since 2012, deepening the Clapham housing shortage.

This discovery is an important foundation for my concerns about the future of the Clapham property market - when you consider the battle that todays twenty and thirty somethings face in order to buy their first home and get on the Clapham property ladder. This is particularly ironic as these Clapham youngsters’ are being born in an age when the number of new babies born to new homes was far lower.

This will mean the babies being born now, who will become the next generation’s first-time buyers will come up against even bigger competition from a greater number of their peers unless we move to long term fixes to the housing market, instead of the short term fixes that successive Governments have done since the 1980’s.

Looking at the most up to date data for the area covered by Lambeth Council, the numbers of properties-built versus the number of babies born together with the corresponding ratio of the two metrics …

It can be seen that in 2016, 10.79 babies had been born in Lambeth for every home that had been built in the five years to the end of 2016 (the most up to date data). Interestingly, that ratio nationally was 2.9 babies to every home built in the ‘50s and 2.4 in the ‘70s. I have seen the unaudited 2017 statistics and the picture isn’t any better! (I will share those when they are released later in the year).

Our children, and their children, will be placed in an unprecedented and unbelievably difficult position when wanting to buy their first home unless decisive action is taken. You see it doesn’t help that with life expectancy growing year on year, this too is also placing excessive pressure on homes to live in availability, with normal population growth nationally (the number of babies born less the number of people passing away) accumulative by two people for every one home that was built since the start of this decade.

Owning one’s home is a measure many Brits to aspire to. The only long-term measure that will help is the building of more new homes on a scale not seen since the 50’s and 60’s, which means we would need to aim to at least double the number of homes we build annually.

In the meantime, what does this mean for Clapham landlords and homeowners? Well the demand for rental properties in Clapham in the short term will remain high and until the rate of building grows substantially, this means rents will remain strong and correspondingly, property values will remain robust.

Do let me know if you are looking to invest and you could use a hand. if you are a ready and able investor sign up to my list that will bring packaged deals to your inbox! If you are looking for no-obligation advice then drop me a line and let's start the conversation.

Clapham Property Market and Hammond’s Budget Promise to Build 300,000 more homes

I miss the good old days of George Osborne as Chancellor, with his hardhat and hi-vis jacket. He must have visited every new home building site in the UK with his trademark attire! For the last few years, the nearest Philip Hammond got to donning a ‘Bob the Builder’ outfit was at his grandchild’s birthday party. However, with what appears to be a change in focus by the Tories to ensure they get back in power in 2022, they appear to have fallen in love with house building again with the Chancellor’s promise to create 300,000 new households in a year.

Nationally, the number of new homes created has topped 217,344 in the last year, the highest since the financial crash of 2007/8. Looking closer to home: in total there were 1,135 ‘net additional dwellings’ in the last 12 months in the London Borough of Lambeth Council area, a decrease of 17% on the 2010 figure.

The figures show that 96% of this additional housing was down to new build properties. In total, there were 1,088 new dwellings built over the last year in London Borough of Lambeth. In addition, there were 364 additional dwellings created from converting commercial or office buildings into residential property and a further 71 dwellings were added as a result of converting houses into flats.

While these all added to the total housing stock in the London Borough of Lambeth, there were 388 demolitions to take into account.

I was encouraged to see some of the new households in the Clapham area had come from a change of use. The planning laws were changed a few years back so that, in certain circumstances, owners of properties didn’t need planning permission to change office space in to residential use.

With the scarcity of building land available locally (or the builders being very slow to build on what they have, for fear of flooding the market), it was pleasing to see the number of developers that had reutilised vacant office space into residential homes in the local council area. Converting offices and shops to residential use will be vital in helping to solve the Clapham housing crisis especially, as you can see on the graph, that the level of building has hardly been spectacular over the last seven years!

Now we have had the autumn budget, Theresa May and Philip Hammond have set out their stall with housing as their key focus. I was glad to see the Government introducing a variety of changes to improve housing, including more funding for the supply side and an injection of urgency into the planning system.

The biggest question is, just where are the Government going to build all these new houses? Maybe a topic for a future article?

Back to the main point though and the focus on the housing market by the Tory’s is good news for all homeowners and buy to let landlords, as it will encourage more fluidity in the market in the longer term, sharing the wealth and benefits of homeownership for all. However, in the short term, demand still outstrips supply for homes and that will mean continued upward pressures on rents for tenants.

I hope you enjoyed reading. If you are keen to take things further, be it to start from scratch, or do something a bit more interesting with your current portfolio... Start the conversation on email. I'd love to meet you in person of course at this month's Clapham Property Meet, so do come along. Click here for tickets and more info.

High Yield HMOs vs Low Yield New Build - which is best in Clapham?

Yield.

An often discussed metric in property, but what is it exactly?

Well there's different kinds of metric to measure the performance of an investment, and gross yield is probably the most basic form of measurement.

So what does it tell us? Well it tells us, broadly, how the investment will perform. Generally a yield of 4%-6% is the going rate for a London property, even less in Central London, more on the outskirts as generally the "safer" an investment the lower the yield. For reference let's remember the interest you get from your savings will be 0.5%-1%. But "safe as houses" varies, as does yield!

So let's drill this down a bit further. The above is only really relevant if you buy the whole property with cash and you ignore all the annual expenses. Truth is you won't generally buy with cash and you have to pay for letting fees, voids, repairs and insurance (and a lot more, I'm sure). So does that mean we have to measure net yield? Maybe. You can't predict all the expenses you're going to incur, but if we compare two opposite properties the picture will become clearer.

I was pitched a new build property in this development called Camberwell On The Green the other day. A lovely new build development - you'll never guess where it was. Anyway, a 2bed there was being sold at £695k with a £2000 service charge and an estimated rent of £2200. Estimated. Real rents probably about £1700-£1800pcm. Service charge of £2000p.a. and so forth. For the sake of argument I'll base the numbers on a rent of £1800pcm.

Let's compare this to a 3 bedroom house in a similar area that you could let to 5 sharers, using both reception rooms. Yes more maintenance, a bit more legwork when letting but let's compare them and see how they fare just for this example.

I prefer to use the Return on Capital Employed metric because this will take into account a few other factors such as:

1. You will have only paid a 25% deposit, the rest is leveraged from a bank (account for the interest payment in the monthly costs).
2. You may be able to add value and refinance, so you can apply this metric to the final figures once you have refinanced your property
3. This takes into account all the running costs. On a new build the repairs will be less but service charges will be higher. Houses with multiple tenants or Houses in Multiple Occupation tend to incur more management costs, both time and money-wise.

When I run some numbers through my spreadsheet such as projected income and expenditure I actually find that the gross yield for my hypothetical HMO is 5.57%. Respectable, but despite leverage this actually drops to 5.16% ROCE after taking into account the bills and management costs. Still miles better than the new build though: 3.09% gross yield and 1.1% ROCE.

So why should you invest in a new build? Well, above points to "you shouldn't" as it's the least likely to cash flow. In fact, I had to run the numbers on a 42% loan to value scenario because the rent achieved would need to cover 145% of the mortgage payment. And unless you put down 58% deposit it won't, and you'll find difficulty in finding a lender. So leverage will hold you back if new build is the way you are thinking of going. Service charges are enormous vs repairs on an older place (and service charges are guaranteed, you may be lucky and not need repairs).

The other point that I'd stress is that a new build is very niche in the sense that they will often be much more expensive than other local properties - developers will command a premium for their "brand new" flats. A 2bed in Camberwell goes for anything from £350k upwards, a period one for about £550,000, the new builds are being sold at a far higher price! However when you come to sell it's not brand new anymore. Remember that new car you bought? Right. Property is same same but different. If you hang on to a new build for long enough they will certainly go up in value like the rest of the market, but the first 5-10 years you will find that the value doesn't change much, in fact it probably goes down a bit because the developer is still finishing off the development, there may be a few unsold and if you decide to sell that particular day you would have to compete with the developer, so probably would have to sell at a cheaper price. Each development is different of course and there is certainly a market for people reserving a particular unit and then trading it on to someone else, but this is more common for developments with hundreds of units and built over 3-5 years. Let's ignore this for now.

In summary the values will go up at the same rate, but only once they've "normalised" and the premium is gone. In the same way a car's depreciation will become more reasonable once it's say 3 years old. New build is lovely and new, but if you're employing your money as an investment you will want better returns than a new build can offer you I trust! As you can see in the graph above, like-for-like comparison will see period property become more desirable in the long run, at least so is my prediction based on my years of experience.

So what to buy? Well new build if you must, they are as low maintenance as property investments come, but I would still advise putting your money elsewhere. There are plenty of developer projects where you can fund a property investor and make a 5-8% return on your money without taking any of the risk of enormous service charges and the like. If you do want to get more involved and benefit from longer term capital appreciation then buying a property to add value to in South London will most certainly offer good returns. I am currently averaging 22% return on capital employed over my last years' projects and I have two more in the pipeline which I'll tell you about in due course. If you want to hear more and how you can invest for better returns just drop me an email or come down to the Clapham Property Meet - we have an exciting talk on this month about property finance and I'll be running through my most recent deals with the audience too.