261: Where to put your property money in 2007
Navigation trail: / latestnews / archive / 261 - published: 18-01-07
This year kicked off with a new way to invest in the South-East's irrepressible housing market. Ross Clark looks forward to the next 12 months
Property investors have been feeling rather perky of late; yet another year of sharply-rising prices defying predictions of doom. But no-one looking to buy property in Britain in 2007 is going to be picking up assets on the cheap.
With a full decade of rising prices, and average property prices now standing a little over eight times average earnings, those looking for value will have to wait - or look elsewhere. What the property market does offer, on the other hand, is momentum. As David Miles, chief UK economist for Morgan Stanley and former adviser to Gordon Brown, recently said: prices are rising because people are expecting them to carry on rising.
Admittedly, Miles made this suggestion in the context of a warning of 'significant falls' in property prices in the year to come. But in the near future at least, prices look to be on the way up. Mortgage-approvals are rising, the supply of homes for sale is still limited, and mortgage-lenders - in spite of rising interest rates and the shocking rise in personal insolvencies - are still loosening their lending criteria.
So where and what to buy if you want to stake your chances in the property market in 2007? The clear winners in 2006 were properties in London and the South-East. And that, says Jacqui Daly of Savills, is a trend likely to continue. "I would go for suburban houses in London and surrounding commuterville," she says. "That is where rental demand in strongest and you are likely to see lowest voids. Investors have tended to concentrate on flats, but there is a lot of demand from families, and evidence of a lot of gazumping in recent weeks."
Richard Donnell of Hometrack is thinking further afield. "If I were looking for a home which would increase in value I would look for a decent family home in an established residential area of a northern city, such as Leeds, Harrogate and Newcastle. These markets have underperformed over the past couple of years. A large family house is no good, however, as a rental investment. If I were buying as a pure investment in the South-East I would be looking for a property in one of the new towns with good rail connections to London, such as Crawley, Harlow and Stevenage. There aren't many rental properties in these towns and you can get a good yield."
Central London, says Liam Bailey of Knight Frank, has outperformed the rest of the country over the past year and is likely to do so again this year. "But if you are relaxed about risk you might consider some secondary locations which are going to be beneficiaries of infrastructure and other improvements over the next couple of years. The Medway Towns will benefit from the Channel Tunnel Rail Link. In Hull and Teeside there has been a bottoming-out of the local employment market and there is a lot of government money pouring in. In Carlisle there is going to be a big expansion in higher education in September, which is leading to a lot of interest from investors."
The big unknown in 2007 is the effect on the property market of Real Estate Investment Trusts (REITs). Potentially, these tax-efficient investment vehicles, introduced in Britain for the first time on 1 January, could transform property investment, making it attractive to a much wider number of small investors. At present, if you wish to invest in the property market you must take a very large stake: ie you must buy an entire property, usually funded with a mortgage. This can be a dangerous venture. Moreover, letting a property is not a straightforward investment: you must also manage - or pay someone else to manage - your property.
Investing in a REIT does away with these disadvantages. The REIT is essentially a pooled investment fund which owns a portfolio of properties. REITs have considerable tax advantages over ordinary property investments: providing that they distribute at least 90 per cent of their rental income in dividends to their members, they are exempt from corporation tax and capital gains tax. The investor is still liable to pay income tax on the dividends, but you could avoid this by holding REIT shares within a tax-free Individual Savings Account or ISA.
But, in spite of the fanfare surrounding their introduction, there are not yet any REITs specialising in residential property. All that has happened so far is that nine long-established commercial property companies have converted to REITs, such as British Land, the owner of Meadowhall shopping centre in Sheffield. Those who invested in these companies a year ago in anticipation of the move have made some handsome gains - the average property company shares rose 46 per cent in 2006.
Of course, this is likely to be a one-off upwards adjustment in value in response to the tax advantages and the fact that companies have had to increase their dividends in order to qualify for REIT status. Gains of that magnitude are unlikely to be repeated.
Residential investors have been watching this closely. "There is no shortage of money in the city wanting to provide seed capital for residential REITs," says Liam Bailey. "We may see some residential REITs emerging over the next few months. The REIT legislation is helping to underpin demand."
Source:
Telegraph.co.uk