As we head into what has felt like a rollercoaster of a double dip recession, Mark Walton, managing director of Walton Robinson, shares his view on how the North East property market is affected, and more importantly, how investors should seize the opportunity at hand.
Everyone remembers the property boom in the late nineties – it was a great time for buying investment properties and it didn’t take much genius to work out how to make a decent return as values were climbing rapidly.
But if you remember the boom, then you’ll remember the bust of the 2008 recession, bringing us an unstable economy, nervous lenders, poor sales figures and loss of returns on most types of investment.
The North East property market has been affected by the double dip, however, in a different way to how it was affected by the 2008 recession. At the time, confidence in almost all investments reduced significantly. The demand, and in turn value, of almost all types of property were dramatically reduced. The difference with the double dip is that values have already gone through an adjustment process so they are stable; but finance is still hard to secure.
The Bank of England recently announced that mortgage rates are due to increase further, making it more difficult for first time buyers to get on the property ladder, and a report by Joseph Rowntree Foundation found that 1.5million 18 to 30 year olds will be forced into private renting over the next 8 years.
Savvy investors are taking advantage of this set of circumstances. Investors are buying up great value for money properties and tenanting them – at very attractive rents due to the demand – with potential first time buyers, young families and students who are renting as opposed to buying.
Newcastle upon Tyne is a prime example ofÂ a highly saturated lettings market due to the large amount of students, graduates and young professionals wanting to live in the area. Landlords are now seizing the chance to enjoy good returns by building their buy-to-let portfolios, much like we saw in the property millionaire boom days.
The Council of Mortgage Lenders reported recently that new buy-to-let lending has risen by almost a third over the last year and in the first quarter of 2012 32,000 loans have been taken out totalling Â£3.7bn.Â These figures areÂ very encouraging as investor demand underpins the market and provides a supply of property to rent to those who currently cannot afford a deposit or don’t want to take the risk of buying.
People may be surprised to hear such positivity in the property market, most likely because there is often a lot of doom and gloom reported in the media during a recession. However it is important to understand the facts, as market trends can be quickly swayed by a change in confidence.
If values are close to, or at as low a point as they can go, the next questions one might ask are “will values go up sooner or later?” and “will values go up slowly or quickly?”
The answer to these conundrums is all about confidence. Values dropping and finance being difficult to come by (not necessarily in that order) affect investor confidence. The Government has the tools to drive demand – it is just down to if, how and when it decides to use them.
Those who are willing and able to take the leap of faith now to invest in property however can find themselves a real bargain and realise considerable rental returns in the short term, which could then also pay off in the medium to long term when capital values rise again. There is even the possibility, if the Government decide to stimulate demand and interest rates remain low for too long, that property values could even snowball.
A recent UK landlords’ survey carried out by CHL Mortgages (May 2012) showed that 71% of respondents are positive about the buy to let market. It also found that 59% of respondents plan to sit tight with their current portfolios, with 31% intending to acquire more investment properties in the next 12 months.
If you compare property to the very low returns in most other types of investment or savings, it goes without saying that a double dip recession is perhaps the best time to buy up property, and even more so if the plan is to rent it out.
Which areas are best to invest in buy to let properties right now?
There are four top areas in Newcastle upon Tyne to invest right now; the city centre, Jesmond, Sandyford and Heaton but it all depends on the level of risk you are willing to take which would determine the best option for you.
Newcastle city centre properties can achieve the highest rents because it is such a popular area to live in having everything on your doorstep, and property is always tenanted very quickly. However this also means property prices are high, which is reflected in the rental returns of around 4 – 7%.
However the capital value is very robust – on average prices have changed very little over the past three years, making it the safest area of the four to invest in.
Coming a close second on rents would be Jesmond, which has a very similar situation in that it is very popular, quickly tenanted but it can also achieve higher rental returns of around 6 – 8.5%. Capital values are very robust, as in the City Centre.
SandyfordÂ has rental returns of around 7 – 9%. Capital Values are slightly more susceptible to peaks and troughs in the economic cycle. Values can be effected more than in the City Centre or Jesmond locations.
The demand in Heaton is high as it is a prime location set just outside the city centre with good transport links and prices are less expensive for a comparable condition. The only issue is that supply is also high so Heaton properties can be more difficult to tenant quickly; therefore the best mix of location, condition and value for money is key to finding the right investment.
The main factor to consider is that capital values of Heaton properties fluctuate, meaning it is a riskier investment than that of the city centre or Jesmond. If you are comfortable to invest here for a longer period then the fluctuation shouldn’t matter as you can achieve steady returns of around 7 – 10%.
Heaton has also seen two supermarkets open up in recent years, Tesco Express on Chillingham Road and a Sainsbury’s on Benton Road. This helps underpin long-term attractiveness to the area and in turn helps sustain property values for the future.
If you are more interested in a capitally robust investment in Newcastle city centre, Jesmond or Sandyford then its best to look for a property that is in a poorer condition, as investors may be able to raise a deposit but affording a refurbishment on top can be a stretch so there are good deals to be had.
Overall the best place to invest right now depends on what your aims and objectives are for investing,Â but Heaton currently offers the best opportunity to find an outstanding deal.
By Mark Walton, managing director of Walton Robinson