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Since last posting a comment back in June, we have sweltered through the long hot summer. We continue to sweat as summer stubbornly refuses to give way to autumn even as November approaches! Meanwhile the property market appears to mirror the weather. For the past eight months or so, the prime London market has sent the mercury soaring. A strong bonus season at the end 2005, after three or four dry years, was the spark that lit the fuse and this, coupled with a flood of foreign money, has seen prime property prices jump by some 15% since the end of last year.  Naturally this has infuriated the doomsters, whilst delighting those who stuck through the falling yields post dot com and 9/11. When the market moves so fast and so unexpectedly it is even more tempting to ask when will this end. As ever, that remains a question that no one can truly answer. We believe that predicting the market is a lost cause and so our clients should focus more on what is secure as an investment and is well placed to enjoy what the market still has to offer, whilst being able to hold its own through any downturn.  To that end, quality is the key and we believe that investors should carefully cherry pick the right properties and ensure that these are presented and placed on the market for rent to a standard that surpasses what tenants currently expect.

Over the 23 years or so that I have been in property, I have seen markets rise, fall and stagnate. In all types of weather, it is the quality property in the right locations that win through. A long term investment will experience many market fluctuations and fear of a downturn should be faced confidently. There are only two types of unhappy client we come across, those that have not invested and those that were invested.  This market may yet go on and on, certainly the supply side looks pathetically inadequate to meet the demand. However, if we have a correction (most likely modest but drawn out in my view) the key is in sitting it through and that is when quality really matters.

It is clear that the stock markets’ performance has a material effect on people’s wealth, yet both rises and falls in recent times are encouraging people towards increased property ownership.

Property owners have been the real winners over the past 10 years. When the UK economy emerged from recession in the mid 1990’s, the property market took off. This was due in the main to interest rates falling sharply. The subsequent robust performance of the UK economy has led to rising household incomes and historically low levels of unemployment. Couple this with banks’ eagerness to lend money, hence the advent of the buy-to-let loan, and you have all the ingredients for a property boom. But the past decade has seen a few bumps along the way. We had the Asian monetary crisis in 1998, the bursting of the dot come bubble in 2000 and the downturn in the financial markets that followed in 2001-2003. In each situation, property prices momentarily checked themselves, before carrying on their relentless climb. Rising equity markets over the past 3 years have made people feel wealthier and this has clearly increased the demand to invest further in property ownership. Whether this is part of a rational investment strategy, or simply a desire to realise dreams and aspirations, is not so easy to determine. For whatever the motivations, property has continued to perform strongly both in the UK and in most other parts of the western world. However, in recent weeks the equity markets strong performance has come to a rude halt. Many stock markets are back to where they were at the beginning of the year and investors are starting to feel vulnerable and exposed once more. Memories are still fresh when it comes to their depleted pension funds and the carefree ‘advice’ given during the dot come bubble. With equity prices in retreat, investors are turning again to the asset class they best understand.

Prices rise when demand outstrips supply; it’s as simple as that.  As investors chose to place their money in bricks and mortar they find themselves competing with the domestic owner occupier market as well as the growing international market.  The latter tend to buy for 2^nd or 3^rd homes. Foreign buyers tend to hold their property for longer than domestic buyers. Consequently the volume of available property year on year shrinks as the overseas market increases. An indication of this perhaps was an example of four properties within our client’s portfolio that we sold in the first quarter of this year. Three out of four were originally bought from domestic (British) sellers. Three out of four were SOLD to overseas buyers. Much was being written at the time about City bonuses yet, interestingly, none of these four buyers could have been categorised as such. The property values were between £1.4 and £3m and therefore ripe for that market.  There is no doubt that many City bonuses found their way in to property but their impact was, in our view, less than has been reported and it is more the influx of foreign buyers that has influenced the prime London market. Foreigners and owner occupiers tend to focus on the most central locations that they can afford, whereas speculators tend to go where supply is plentiful.

How far can prices go?   The answer to this is impossible for anyone to honestly answer. We know of past clients, experienced developers, economic analysts and others who have been calling the end of the property boom since 1998 and have sat on the sidelines somewhat aghast as they watch the level of wealth being created by others. Understanding why property is so appealing is perhaps an easier task. For a start finance is still readily available and relatively inexpensive. Investors are still sore over the broken promises of the dot com era and miss-sold pensions. Bricks and mortar remains a tangible asset that feels safe when stocks and shares look volatile and many equity based investment products overly complex. At the end of the day it might be as simple as the fact that we all like property. We understand it, it meets many of our aspirations and it is an asset that we can literally feel and enjoy owning.

Don’t wait to buy property, buy property and wait.  We have often argued that estimates of what the market may or may not do in the short term should not form the basis as to whether one should invest or not. Finding good property at attractive prices, where real value can be added should be the determining factor. Property should be looked upon as a long term hold and the key is ensuring it can be held during more uncertain times. Whether the market continues to rise in the short term, plateaus once more for a few years or suffers a minor downturn, it still represents one of the surest and least volatile of investments. Savills predict that prime London property will increase in value by nearly 7% pa over the next five years (as opposed to a national average of 3% pa). Assuming this proves to be the case, a properly self financing investment geared at 60% on gross costs would show a return on equity approaching 100% after 5 years. Meanwhile, the spectre of inflation is returning once more and this carries a warning of potential interest rate rises. We would argue that now is a good time to borrow as well as releasing untapped profits in existing holdings. The key is to lock in at these current low rates. The return of inflation may be uncomfortable to many but no one is predicting the sort of levels seen in the 1970’s and 1980’s. A little inflation can be a good thing, afterall inflation has historically been property’s friend as it helps erode debt.