Investing in property is just like investing in anything else – it’s all about price.
The buy-to-let dream is not over – far from it. But the smart money is looking towards diversification now that the government has changed the rules on pensions, says Merryn Somerset Webb.
If you were looking for a couple who epitomise what success means to most of the UK, you need look no further than ex-teachers Fergus and Judith Wilson. What makes them special? In a word, property.They bought their first buy-to-let investment in the 1990s. Then, as prices rose they remortgaged each property to release enough cash to put down a deposit on the next one. The result, with a few bumps along the way, is a vast portfolio of around 900 houses in Kent now for sale for £250 million (the price Fergus Wilson says he can get) and offering a gross yield of 6 per cent or £14.5 million. They started with nothing, borrowed huge amounts of cash and let the ever-rising UK property market make them rich (assuming they can sell of course).
It is rather amazing – and it is exactly the way much of the rest of Britain hopes to get rich, too. Every time a friend of mine comes into money they email me for advice. But they aren’t asking about pensions, about ISAs, or about the details of long-term stock market investing. They are asking about the best way to live the buy-to-let dream.
You may be wondering what I tell them. These days I tell them that’s a good idea but that they should also sort out a non property pension. They are likely to own the house they live in (or at least be paying off a mortgage that means they will one day) so it doesn’t make sense to buy more property until they are already diversified into something else. That’s particularly the case now that the rules on pensions have changed.
In your will, leave someone your buy-to-let when you die and (assuming you have used up your IHT allowance) they’ll pay tax on it at 40 per cent. Leave them your pension and they will either pay no tax at all on the lot (if you die before you are 75) or they can draw an income from it at their marginal income tax rate – and that’s despite every penny you have put into your pension going in tax free too. It’s a good deal.
It’s also one that I suspect George Osborne hoped would dull the allure of the buy-to-let market as a pensions alternative slightly: after all, it doesn’t help the government in its aim to help every would-be-firsttime-buyer get their hands on their first home if every suitable flat is being snapped up by a middle-aged couple with lots of cash on their hands.
But the relative attractions of other investments aren’t the only reason I steer friends gently away from their Wilson-style dreams. The other is price. Despite the widespread view that you can’t lose with property, you quite clearly can. In the wake of the great financial crisis, house prices across the UK fell around 20 per cent from their peak. Add in the effects of inflation and average prices ended up down by well over 30 per cent with some areas in the north seeing much more spectacular collapses.
“I tell them that’s a good idea but that they should also sort out a non-property pension”
The lesson? Investing in property is just like investing in anything else – it’s all about the price. The main determinant of how much return you might get from any asset is the price you pay for it. Pay too much and your returns will be rubbish. Pay the right amount, hold it for long enough to ride out a credit cycle or two and they should be pretty good.
This brings us to the problem: prices in the UK don’t look quite right. Deutsche Bank has recently done a study into global house prices looking at historical price to income and price to rent ratios. It turns out that in the UK, houses are “in their top 20 per cent of expensiveness relative to history”. That’s not good. Those wanting to give up on the home market and go abroad to sunnier climes should note that cheaper markets include Germany, Greece, the US and Italy. But I still think there is an argument for keeping your money at home.
The UK numbers are distorted by London – prices in the centre have now begun to stablise but overall they have held up very well. Cut out London and prices are knocking around their historical averages relative to household incomes. Go north and it’s an even better story. Prices are low and yields can be high: the average return in Sheffield is 11.6 per cent and in Aberdeen it is 10.4 per cent.
Which rather puts the Wilsons and their paltry 6 per cent (before expenses) in the shade doesn’t it?
So where would I suggest friends put their money now – with a 10-15 year timeframe? I’d send them up towards what might one day be the UK’s new supercity: what ex Goldman Sachs man, coiner of the term Brics, and now chair of the City Growth Commission, Jim O’Neill, refers to as ManSheffLeedsPool. This would be amusing in itself (most of my advice seekers are firmly southern) but my guess is that they’d also find it more satisfying financially than, for example, Kent over the next 20 years. Parts of these four cities already have some of the lowest prices and highest yields in the UK but both could soon be much higher. It’s all about transport. The call for decentralization and for efforts to move some economic activity from south to north is strong.
O’Neill reckons (and I entirely agree) that the best way of doing this is not to connect the north better to London (the usual solution to the problem) but to connect them better to each other with a huge infrastructure spend – partly on a high speed trans Penine railway – and the introduction of “seamless” payments systems in the manner of London’s Oyster card. Right now it takes two hours to get from Liverpool to Leeds. It’s 65 miles. That’s ridiculous. There’s momentum and sense behind O’Neill’s ideas – I think we can assume that one way or another, the north is soon to see the arrival of various forms of both increased spending and devolution.
“The main determinant of how much return you might get from any asset is the price you pay for it”
Wouldn’t it be good to have a long term property investment in the area before the money arrives? At the top end of the market, Savills has a Grade II listed hall for sale in Matlock (and a cottage) for a mere £1.75 million. If that’s over budget you can have a seven bedroom house in Manchester for £499,000 or a nice coach house conversion in Newark for a mere £195,000. For anyone who insists on keeping their money in the more overpriced south of the UK I have one more suggestion: buy somewhere a retired person might like to live. Our aging population has most of the money these days and recent research from Prudential suggests that some 2.3 million 55-65 year olds are intending to move house by 2017. You might as well own something they’ll want to own before they start looking.
Merryn Somerset Webb is Editor-in-chief of Moneyweek, the UK’s best selling financial magazine. She also writes a column in the Financial Times. You can follow her on Twitter @merrynsw.
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