Kings Residential

Darren Shaughnessy, Director Kings Residential, Estate Agents in Manchester  and Letting Agents in Manchester writes:

 It amazes me that the property developers keep building 1 and 2 bedroomed apartments in the numbers that they are and are ignoring 3 and 4 bedroomed apartments. Whilst there is clearly demand for one-bed apartments in Manchester it is also clear that 2 bed apartments are over-supplied and that the economics for the property investor are not as solid as they used to be. This means that in the longer-term the developers are going to have a harder and harder time selling the properties that they are building.

 I think the logic seems to be that families who would need 3 and 4 bedroom apartments are not really buying in city centres so there is no point in building this format of apartment. However, it is fair to say that owner-occupiers form a tiny proportion of city centre property buying anyway so this is not a logical argument to dismiss the idea. The people who are buying these properties are Property Investors and the people living in them are young professional tenants.

I believe that the developers and the town planners have got everything wrong here. The planners have been demanding 2 bedroomed units and the developers keen to placate them have been developing them. However, as the economics of the buy to let invetsment get tougher I think we really need to look at an alternative. Just check out the numbers: 

A 700sqft two bed flat for sale in Manchester at £180,000 with a £150,000 mortgage payment in the region of  £750 per month on an interest-only mortgage. With a rental income of £750pcm (before letting fees and void periods) this is not too bad as the bulk of the mortgage is paid for by the tenant. However, a 3 bed apartment in Manchester which would require about an additional 200sq ft would cost about an additional 30% but the rent would increase by 50%. Extrapolate these figures to 4 bedrooms and you get to 1100 sqft of apartment costing about 60% more than the 2 bed but achieving double the rental income.

 It seems so logical to me that this is the way forward both for the buy to let investors, the developers (keen to maintain the price per sqft) and also for the tenants. As a letting agent we see very few 3 bedroom city centre properties on the market for rent but when we do they are snapped up very quickly. I have never seen a 4-bed apartment in the city centre. So come on developers, lets see lots more 3 and 4 bedroom apartments. It is good for everybody.

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Darren Shaughnessy, Director Kings Residential, Estate Agents in Manchester  and Letting Agents in Manchester writes:

The International Monetary Fund (IMF) has warned that UK house prices are overinflated by as much as 40%. This is a stark warning when you consider that the US has seen a house market slump off the back of a lower level of house price inflation than we have experienced in the UK.

House prices in the UK are now nine times average income compared with 5 times in 2001. This kind of growth is unsustainable and clearly some level of correction is necessary. However, is it as simple as all prices will fall?

I take the view that the general public and property investors have come to view property as a straight-line ’safe as houses’ investment. They seem to think that you can buy any property anywhere and in 7 years time the price will double. However, the property market is not as straightforward as most people think.

The entire housing market can go up or down just like the stockmarket but with much more latency and with much less volatility. It takes a very serious situation to induce a major reduction in prices in the housing market. Unlike stockmarket investors, property owners don’t typically panic sell to cut their losses. It takes a few weeks to offload a property and as most property owners actually live in their properties a reduction in prices is far less likely than price stagnation.

However, this is a global view. There are regional variations in the housing market just as there are industry sector variations in the stock market. Individual houses, streets or suburbs can over or under-perform the general market in just the same way that a company can over or under-perform on the stock market.

In the solid established suburbs where hard working people have been buying properties based on sensible multiples of their income and the mortgage payments are affordable I see no reason why there should be a major fall in prices. We may see some stagnation in the market as people become nervous of buying property. Some locations are just plain desirable. If one potential purchaser is put off there will be 2 more around the corner. Some locations are on such a strong growth curve that even in the face of general price-stagnation they will continue to see small rises in prices despite what is happening elsewhere.

There are areas where I believe we may see a fall in prices. In these places the economics do resemble the dotcom boom to an extent, however I would not predict a catastrophic reduction in prices as occurred when the dotcoms went bust. (See my article Selling on the buy to let investment dream).

I believe that a major fall in prices can only really happen when home owners HAVE to sell or are repossessed as they were in the 1980’s when the interest rates crippled homeowners. I don’t believe this scenario can happen again on this scale. Margaret Thatcher and Nigel Lawson are on record as saying that their policy of increasing interest rates with the intention of reducing inflation was flawed. Can you imagine any Chancellor is making the same mistake again?

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Darren Shaughnessy, Director Kings Residential, Estate Agents in Manchester  and Letting Agents in Manchester writes:

Many of our City Centre’s are awash with cranes as apartment complex after apartment complex change the horizon of our towns and cities.

These are largely funded by the Buy-to-Let investor. The developers are offering easy-in options to the Buy-To-Let investors so it is attractive at least on paper to the Buy-To-Let investor.  

However, on re-sale it is not feasible to offer the same easy-in incentives to lure the property investor. In these locations the apartments become much more like a commodity item. Realistic re-sale values are based much more on demand and supply and the income potential of the property than the original purchase price. The majority of these apartments are too expensive for the local population to buy in the kind of numbers that the long-distance investors are buying. This immediately makes these apartments difficult to re-sell so the price has to be lowered to a level that appeals to investors.

In deciding where to buy, the investor should be looking at the overall income potential of the investment and that is based far more on the rent-paying potential of the local population than any other factor. The income of the local young professionals and wannabe city centre dwellers dictate the realistically achievable rent for a property. In Manchester, for a standard apartment this equates to £750-850pcm in the city centre, £650-750pcm on the periphery. Obviously facilities such as parking, gymnasiums, pools, concierge, and extra large apartments will result in higher rents.

The reality for many Buy to Let investors is that the rental incomes are not covering the mortgages. This is not necessarily a huge issue as in many investors eyes the affordable difference between rent and mortgage is a small price to pay for the long-term return because a third party (the tenant) is paying the majority of the mortgage. However,  those who believed they would achieve significantly higher rents or have purchased multiple properties, and have mis-budgeted find themselves in a negative equity-negative rental income trap. They cannot realistically find a buyer fast enough to leave the property empty for re-sale. Equally they cannot afford the mortgage payments without the rental income and even with the rental income they are falling uncomfortably short. Once a tenant is in the property it is only realistically saleable to another investor but the developer down the road is offering a very sweet deal indeed.

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