Property Pitfalls

    James Goldsmith, Director Central London Markets talks about making the right investment decisions.

    For many years, London has been the main focus for international investors, topping the tables as the location of choice. The market is substantial, transparent, liquid and, crucially, easy to trade. This year’s Development Securities’ report Who Owns The City shows that, for the first time, over 50% of the City of London’s investment stock is held outside British hands.

    Strong international demand continues in 2012, with many key deals closed by overseas investors so far this year.

    The result has been higher prices and lower yields, seemingly unthinkable in the dark days of 2008/2009. There is clearly a recognition of the safe haven London real estate offers, being a byword for capital preservation and a hedge against currency movements.

    But just buying investments in London is not enough to guarantee success. In fact, with the capital being one of the world’s most cyclical markets, investing in London can turn out to be loss-making for the inexperienced, ill-advised or untimely.

    Rental cycles can be volatile, especially in the City of London where prime rents have moved from £40 per sq ft to £75 per sq ft in the core markets and then back again several times. Rent-frees, negotiated by ingoing tenants, are long. So to achieve long leases on letting and re-letting, landlords have to be happy with long periods without income and even the burden of local taxes on empty property. Lastly, rental increases at rent review are a specialist area where uplifts can be notoriously difficult to achieve.

    There has also been a consistent supply of new buildings, again especially in the City of London. This has had two effects. Firstly, rents have been kept in check because a ready supply of brand new space means there is always “better” accommodation for tenants to lease.

    Secondly, depreciation can be a serious issue where even a 10-year-old building can look dated and older buildings are seen to be seriously out of date with refurbishment costs sometimes close to the cost of new build.

    So acquiring an average building with a medium term income profile, which might look attractive based on running returns, can prove investment folly. At the end of the lease, if the tenant leaves, the landlord can face capital expenditure, long rent-frees and ultimately rents at Grade B not Grade A levels, which in turn means significant valuation problems. Real estate brokers won’t touch on these issues when transacting, but property advisors will.

    The key for investors is a sensible rental profile, from which growth can be achievable, quality assets in the right location and a flexible specification that can be upgraded and modernised both cheaply and efficiently. Today, more than ever, stock selection and measured advice on market values and the costs of refurbishment are the keys to successful investment.


    Key contacts

    James Goldsmith

    James Goldsmith

    Central London Markets

    Savills Margaret Street

    +44 (0) 20 7409 9918

    +44 (0) 20 7409 9918