Should you invest in the UK?

While the rest of the UK property market has been flat or falling, London is reviving. But is that a strong enough temptation?

PORTFOLIO POINT: Despite its revival, the London property market remains vulnerable to problems in Europe and to international money flows.

As the Australian dollar grows ever stronger against the US currency, Eureka Report is exploring the overseas opportunities that should be on your investment radar. But what readers may not know is that the local dollar is also at an almost 30-year high against the pound. With this in mind, we take a look at what the London property market has to offer.

The UK economy has been moribund since the onset of the global financial crisis. In real terms the UK economy has contracted by about 4% between the first quarter of 2008 and the last quarter of 2011 and unemployment has ballooned from 5% in early 2008 to 8.4% today, according to the UK Office of National Statistics.

Compare this to the benign data from the Australian Bureau of Statistics, which shows that Australian GDP has risen by about 10% in real terms over a similar period and an unemployment rate that sits at just over 5%.

Unsurprisingly, faced with these economic headwinds UK property has struggled, with the national median price down about 17% since the start of 2008, according to the Halifax House Price Index. London prices have fallen about 13% over the same period. In the past 12 months, prices have been flat nationally but have risen about 8% in London.

But these figures don’t tell the real story of the UK property market, says high-profile UK buying agent Henry Pryor. “The UK property market, just like the Australian market, is a patchwork of different individual marketplaces, some doing better than others,” he says. “Last year, Kensington, a prime inner-west London city area, rose 7.8%, but Hartlepool, a port economy 400 kilometres northeast of London, fell 17.5%. House prices in parts of Northern Ireland have fallen 30% since 2008.”

Tracy Kellett, managing director of BDI Home Finders, agrees. She sees the UK as two different markets: prime central London; and the rest of the UK. “Roughly described, prime central London covers zones one and two on the Tube map,” she says. “Prices in this area grew by about 10% in 2011. Prices across the rest of the country were flat in 2011, which was an OK result, but I’m afraid I see the outcome for the rest of the country as unrealistically good and artificial.”

Kellett believes prices outside central London are being supported by a lack of stock on the market, due to owners’ unwillingness to upsize in tight economic times coinciding with fast-growing rental prices forcing some people to buy. She does not see this situation as sustainable.

“Quite simply, mortgage interest rates are incredibly low, at 3-4% and people aren’t in dire straits because their mortgages are really, really cheap,” she says. “But interest rates are going to start creeping up in about a year. The banks are already starting to say they won’t do interest-only mortgages, which a lot of people are depending upon at the moment to meet their repayments. So when it comes to renewing their mortgage, they’ll have to take a repayment mortgage and their monthly payments could easily double. With unemployment destined to grow outside the southeast of England, it’s not going to be a pretty picture for property prices.”

Pryor and Kellett agree that prime central London’s exceptional resilience stems from the affluence of its buyers and, in many cases, their ability to pay for property with cash. “London is a microeconomy,” says Kellett. “It has to be seen in a completely different light. People have jobs and wealth. And as economic woes continue in Europe, London is increasingly been seen as a safe haven for cash. In Mayfair and Knightsbridge, 90% of buyers and the owners are foreign nationals. Interest rates have no effect on that market. Central London is awash with overseas cash and that is not likely to change in the medium or long term.”

I asked whether there still a window to invest in London. Kellett sees value. “If you find the right property in central London you can still do well. But if you’re investing from overseas, keep your choice of property simple to avoid headaches – no student and multi-dwelling properties – and give the property to a local managing agent to oversee.”

While the economy and property market in the UK may seem quite different to Australia’s, there are parallels. Both economies suffered in the GFC, albeit to differing extents. And in each country there have been marked divergence across locations in the response of property markets to circumstances.

Clearly, it is London, the UK’s most affluent and economically diverse market, that has weathered the recessionary storm best. Similarly, the likes of Sydney and Melbourne have performed relatively solidly since 2009. In contrast, it is regional centres, be it Hartlepool or Belfast in the UK or the Gold Coast or the Sunshine Coast in Australia, that are extremely vulnerable to economic downturns.

Would I invest in central London today? I would if I were an affluent international investor looking for security in the face of an economically vulnerable eurozone. Otherwise I would be a bit worried about being sideswiped by price volatility caused by international hot money flowing in and out of the capital.

More fundamentally, I’m put off by the risk of a deteriorating European crisis dragging the UK economy further. So for now, I think I still prefer Australian capital city property markets to London because: I understand them; and because their attraction is predicated on a strong economic story going forward rather than being the least-worst option in a frantic European environment.

Property Q&A

This week:

  • Wollongong’s prospects
  • A Moorabbin warehouse.
  • Adelaide and Olympic Dam.
  • Investing in Melbourne.

Wollongong

I am thinking of investing in a one or two-bedroom unit in Wollongong. Can you advise me of the long-term growth potential, and in which area of Wollongong I should look?

Wollongong is a good entry point into property investment, especially for sub $350,000 investors, as it’s a larger regional town within commuting distance of Sydney. For Wollongong investors, access to the freeway to Sydney is vital. When property prices escalate in capital cities, new residents are attracted to cities such as Wollongong where they can buy a larger house and drive back to their current job in the capital.

Look for properties in precincts closest to the CBD, such as North Wollongong, which are well served by public transport and other social infrastructure such as schools, shops, parks and beaches. An ideal property would be a two-bedroom unit in an older style – 1950s to 1970s – low-rise block containing a maximum of 10-15 units total, with dedicated parking. The unit should be optimally placed in a block so that it has a pleasant outlook, away from the bins and traffic, benefitting from lots of natural sunlight and is secure.

Warehouse

Your top five (see Five for 500, in the Q&A, here) does not mention any commercial property. Is it that far down your list? I am thinking of a small warehouse in Moorabbin, Victoria, where I’m hoping for a higher return than residential with fewer headaches.

Commercial property investment is a very different and much more complex proposition than residential investment. For instance, commercial property valuations are a direct function of rental returns and the length and quality of the tenant lease. For residential property, the real driver is land value.

Scale is another issue. It is possible to access high-quality residential property with about $400,000. With commercial property, one often needs to have a budget of $1 million or more to avoid compromises. Another downside is that if your tenant goes bankrupt, there is a good chance you’ll forgo substantial sums in lost rent and may struggle for several months to obtain and install a new tenant. With good residential property, one can usually move a new tenant in relatively quickly.

There are some pluses with commercial, such as that the outgoings (including maintenance and rates) are paid by the tenant. Overall, I would suggest there are potentially many more headaches with commercial property than with residential property. I would only encourage very experienced investors to consider commercial investment because of the expense and relative complexity.

Turning to your proposed warehouse in Moorabbin – which is about 20 kilometres southeast of Melbourne’s CBD – you need to answer the following questions. Is the building already leased? To whom? For how long and with what sort of options? You may also need to consider whether in the long term the demand for and supply of warehouses in Moorabbin will support values. Bear in mind that warehouses are not a scarce commodity in this part of the world.

Adelaide

In late 2011 we moved from Adelaide to the Sunshine Coast. To part fund the purchase we planned to sell our nine year old two-storey, three-bedroom townhouse house at Norwood but were unable to sell in the period April to December 2011. We have now rented the townhouse, currently valued at around $900-950,000, for $675 a week. We have a good (government employed) tenant for two years and then plan to re-attempt a sale. What do you think of the growth prospects and timing for near-city Adelaide in the next two years and do you think the possible expansion of Olympic Dam mine will have an effect on such residential property?

It is far better to sell a property with vacant possession at the time of settlement than with a tenant in situ, which would exclude the 70% of prospective buyers who are looking for a personal residence. I’m usually not a great fan of townhouses as they can “date” quite quickly and may not produce the requisite level of growth that is derived from more classical architecture. My best advice is to get a local and independent property advisor to assess the property according to street, land and architectural scarcity before you make any decisions.

More generally, Norwood is a picturesque suburb adjacent to Adelaide’s CBD so is prime local investor territory. Consequently, I would expect it to perform well within the broader Adelaide market.

I have observed closely the discussion about the expansion of Olympic Dam, which is likely to benefit the South Australian economy if everything goes to plan. However, it is a long-term project that will take years to reach its potential. In the meantime, the mining boom may or may not end. I therefore think it isn’t wise to predicate too much on its success at this stage.

Melbourne investment

I’m thinking of buying my first investment property in Melbourne. You say that the market is likely to be relatively stable and transparent. Should I secure a property soon or hold off a few months?

For those who are a few months away from being ready to invest, the current market is a boon, as prices aren’t likely to run up and away from them in the meantime. Use the time judiciously to undertake your research and pound the pavements in your preferred areas.

Investors who buy in the next six to eight months should do well in the medium to long term, and may be best served buying in March, April and May, when the late autumn market tends to be in full supply.

More broadly, with property investment, the maxim “time in the market, not timing the market” is generally true. Buy when your finances and other circumstances are right. Given property is a minimum of a seven to 10 year investment, you’ll likely ride a few ups and downs in the market. Don’t let a potential risk of a downturn – which no one can be certain will or won’t happen – paralyse you into doing nothing and not securing your long-term future.

Monique Sasson Wakelin is managing director of Wakelin Property Advisory, an independent firm specialising in acquiring residential property for investors. Monique can be found on Twitter: @WakelinProperty.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Monique? Send an email to monique@eurekareport.com.au

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