Winter 2004/5

Property investment – by Rod Taylor, Alan’s tax adviser Alan and I often hear that people have “invested” in property. But sometimes what they mean is that they have speculatively bought a new flat and want Alan to find a tenant who will pay some arbitrary amount per month that they would like to get.

Whenever I hear of someone going into property trading or investing for the first time I ask how many properties they have actually seen so far, and who is advising them. I am not particularly interested in how many web sites they have looked at, what they think the average growth in cost of property in a particular area has been over the last few years, or what the presenters of TV property shows have said.

If someone wants to buy a flat in Glasgow as an investment, have they seen twenty yet – or fifty? Have they put time into walking around the streets in the area in which they intend to buy – late on a Saturday night as well as in the middle of the working day? Do they look at the GSPC web site every day? Which surveyor are they using? Who is their solicitor? What advice has their financial advisor or bank given them?

So many people say they haven’t got the time for any of this. They end up buying new build flats from drawings because it’s easy. Then they come to Alan and say they “need” a certain rent to cover loan repayments.

Does anyone seriously think a potential tenant is going to pay more rent than the market rate because the landlord “needs” it?

I can see why anyone would want a source of income that will repeat itself every year without a lot of time being put in every year. But why should anyone with any common sense think this can be done without putting the time in to start with? If it was that easy, why would everyone not have done it already? Someone earning £40,000 a year is earning around £20 an hour. To earn another £20 they have to work another hour. When they say they have no time to spend on investment, what they are saying is that they are not willing to spend time (once) to acquire income which can last as long as they live. We have all asked the question “how stupid can you get”: there is one answer.

When my wife (a chartered accountant, and my business associate) started investing in flats to let out, she took the two simple steps of asking Alan where to look, and sending me out to look at every flat that came on the market in the area. I don’t know for sure how many flats I have looked at in the past six years, but it must be at least 500. I still look at one or two every week. My wife and her property company between them now own only seven flats, and have probably offered to buy about forty over the years. The rents should pay off all of her borrowings in around 10 years from now. There is enough “equity” in the flats to facilitate considerable further borrowing – but only if she can find property at the right price. If there was “negative equity” (a moment’s thought will show you how this phrase actually makes no sense, but it is widely used) her cash received each year would still exceed her cash spent.

We were lucky in finding a good surveyor (but only for Glasgow properties, unfortunately) straight off through Alan, but it took longer to find a specialist conveyancing solicitor that my wife was comfortable with and who could be relied on to look after the details of transactions. A surprising number of people overlook details, and in property transactions this can be costly. My wife already had first class contacts in one of the Scottish banks.

Alan and I have had so many enquiries recently from people who don’t seem to understand what they are doing, that we are offering a service – at a price. We will meet you, discuss what you want to do, and offer advice. You then go away and set up an evening of property viewings, and we go round the properties with you. You arrange your own finance, your own surveys and your own legal advice, though if we think you are serious and acceptable as clients, we may introduce you to our own advisers.

Since Alan and I are both businessmen, we charge you, as would your solicitors, your surveyors, or your bank. We also hope that if we all like each other enough, Alan will become your property manager, and my firm your accountants and tax advisers.

Contact us for more information on enquiries@mbmhomelets.co.uk

May 2004 Newsletter

March and April 2004 have been one of the busiest ever spells of enquiries to MBM HomeLets for property to let. This is good news, particularly during a time of record numbers of flats and houses available for renting, and competition amongst landlords leading to a 15% dip in gross rentals over the past fourteen months.

MBM HomeLets has always prided itself on letting property much faster and responding to changing markets more swiftly than large operators and offshoots of estate agents more concerned with self-publicity than clients’ properties.

As ‘void periods’ grow longer in the letting market we have able to keep our own portfolio and our managed properties’ empty spells down to an average of two weeks a year, against a market average of over two months. Unlet properties which we have had listed for more than six weeks whilst volumes are high usually fall into one of the falling categories:
• Too expensive. • Not located in a ‘desirable’ area. • Disappointing when viewed.

Empty properties are bad for all of us. Owners receive no rent but have to keep paying mortgages or loans; insurance has to be paid and probably council tax too. There’s also the security implication of an empty property. Vacancies listed week after week are bad news. We make no money from them; our advertising becomes stale; they take up marketing and administrative time and our owners don’t earn a penny. We need to move on…

The Solution? Perhaps it’s time to sell. The market is undoubtedly on a high, perhaps at its peak; there almost certainly won’t be a better time to sell if you are in a current ‘hot spot’. So that means you’re giving up on rental – sometimes the best idea. Reduce the rental price? Often all that’s needed to get your flat back into the serious market. Sometimes a reduction of £20 a month on the ads is all that’s needed to hit the right rate.

Poor first impressions? We’ll tell you if that’s the problem. Sorting that out doesn’t necessarily cost a lot but you have to think about detail. Wrong area? Not necessarily. Of course the biggest demand remains in the west end, city centre and to a lesser extent, southside. Other areas can be more difficult to let to the business or ‘career’ market but there are other types of renters that should be considered. Good respectable clients who may need to claim housing benefit can be some of the best long-term residents.

We will always give you practical and unbiased advice when it comes to letting and managing your property. Just ask. We’d also like to know what you think and will be pleased to hear from you.

Please e-mail us: enquiries@mbmhomelets.co.uk
Alan Mauchan MBM HomeLets

Winter 2003

And about time too for an overdue newsletter!
This is primarily for our property owners located overseas who maybe aren’t fully conversant with this year’s developments. Obviously we hope that local owners and tenants may find it of some interest as well.
So what has been happening to the residential housing and letting markets this year?
House prices have risen, on average, 22% in 2003 and it’s generally agreed that this is less than 2002. So the sales market is cooling slightly but there still seems to be a shortage of property for sale. This is what forces prices up.
What part does the letting business play in all this? Well actually, quite a significant part if truth be told. To explain this we need to go back a few years and the look at the decline of the UK stock market. It was a point where many people who were looking at their pension provision suddenly realised that things weren’t looking too good. At that time a new phenomenon called Buy-to-Let materialised and within a year it just looked like a godsend. Lenders provided up to 80% of the purchase price of a property which was to be let out. This meant that purchasers put up a hard cash deposit, or simply released equity from their own homes at a time that house price inflation made it easy and logical.
It was all fine because even if the property for renting proved difficult to let, the price just kept going up anyway and it could be sold on with a healthy profit. And that has actually happened over and over, especially in areas of expensive newbuild in Glasgow and Edinburgh.
So has capital growth been underpinning a weakening rental business? Essentially -yes. A side-issue which highly concerns property professionals is that, for the past year and a half, there have been very few first time buyers. And as everyone knows, if you don’t have people getting onto the first rung of the ladder (any ladder, not just property) the entire operation becomes very shaky. Why are there so few first time buyers? Well, price is obviously the main reason with one bedroom flats comfortably fetching over £100,000 in Glasgow’s west end and parts of the south side. The old three-times annual salary lending provision just wasn’t stacking up. In an effort to keep the market moving lenders have become more and more bold and have been offering up to four and even five times salary to ‘blue-chip’ applicants. This has worked, to an extent, but we have to look at precisely who is buying these ‘starter’ homes. That’s where we come back to the Buy-to-Let business. The reality is that huge numbers of properties have been snapped up for renting by people encouraged by generous lending terms and a market that seems to be unstoppable. And these new-age landlords are partly responsible for keeping out the traditional first time buyers who have been forced to rent because they can’t afford to buy. That has been a major reason for bolstering the rental market in the past year. It’s a curious situation too – rents have been traditionally much higher than equivalent monthly loan repayments but so there are actually a large number of trapped and unwilling renters! It’s not the most solid base for a healthy market and will undoubtedly adjust to a more sustainable balance.
So how might that happen? is it already happening? Well yes, because rents have been steadily declining over the past year and, in many locations that can be expected to continue. Edinburgh in particular does not offer a good return if we exclude property price rises; typically 4% and continuing to slip. Maybe you’d be far better turning to the currently revitalising stock market!
Last month’s tiny increase in interest rates is almost certainly the beginning of an upturn that, if historical patterns repeat, could continue for about two years with a rates rise by 2 or 3%. Here are a few figures to think about. If you borrowed £100,000 and we assume you will need 130% coverage taking into account void periods, maintenance, insurance etc. £480 per month rent is enough at a typical borrowing rate of 4.5% but if the rate rises by say only 2% you will need £700.
The alterative school of thought is that UK government only cares about keeeping inflation at no more than 2.5%. The level of borrowing, whether we’re talking about mortgages or credit credit cards, is at an all time high and a dramatic rise in interest rates would create mayhem. So that particular Plan B assumes that the property market is simply re-positioning. Only time will tell, but the fact remains that the market is currently highly artificial and not sustainable in its present form.
There is no doubt that the Buy-to-Let business has reached a peak and is currently saturated. If you are thinking of getting involved, or more involved that you already are, our advice is thing long and hard about it. Serious landlords like MBM are making substantial investments in their portfolios and ensuring that rents can be reduced to avoid empty periods, which in Scotland average seven weeks a year per property. It’s because MBM HomeLets keeps closely in touch with the market that we don’t have that problem – we still average less than an empty fortnight a year on our owned and managed houses. But the basic rule is that letting properties must be well located, well maintained and realistically priced.
All this is food for thought we hope. Let us know what you think or if you have any questions, worries or queries.
1 December 2003

Autumn 2002 Newsletter

The state of the letting market in Glasgow

This report is primarily intended for property owners located overseas who may not be aware of recent changes in the letting market in the UK. As MBM HomeLets deals solely with housing in the Glasgow area we intend to look specifically at our region.

The market has changed radically over the past two years largely as a result of investors becoming involved with 'buy-to-let' with active encouragement from lending institutions. This has appeared to be all the more attractive because other conventional investments such as the stock market have not performed well. Inevitably though the market reached saturation point and landlords who did not buy in the 'right' areas and paid prices that rents will not substantiate are now finding themselves running into trouble.

The average nett yield is now 5.5% nationally (and closer to 3% in London). That is the owner's rate of return after all costs have been taken into account. I'm pleased to say that MBM HomeLets clients are all receiving substantially more than that but a few important points emerge:

• The number of people looking for rented property is almost exactly the same as it was four years ago.
• Last year buy-to-let transactions accounted for more than 1 in 20 house purchases. That means a large increase in houses available for rent.
• Rents are generally not increasing and in many cases are declining. The average void period (not MBM HomeLets) is two months in many areas.
• House prices are growing more rapidly in many areas of the UK. Selected areas around Glasgow (in particular the west end and Shawlands) are seeing substantial rises.

• The prospective tenant now calls the shots. Plenty of choice means that people can be very choosy. The offer of a tenancy can be declined for such a whimsical reason as the colour of the paint in the bathroom!
• Properties have to be maintained to a high standard. The days of cast-off, shabby furniture and decor are behind us.
• MBM HomeLets have been successful and have adapted to change because we saw the warning signs early and insisted that rents were kept realistic. Greedy owners and unrealistic agents have empty houses and flats - we don't.