Following on from my last article -Why Property ? , today I am focusing on capital growth.
Any investor will consider future market value before making a property purchase. The hope of course is that the market will rise and the value of the property will increase. In economic upturns, and in markets such as London, there have been extraordinary gains made by lucky buyers that essentially won a post code lottery.
For those that don’t have the capital to enter the London market (where the average property price is now £534,000[1]), or those that wish to base their investments on a more analytical approach, there are options.
Fundamentally there are three means of securing value increases, with various methods of execution available:
1) Buy into a rising market
2) Add or create value
3) Purchase at a discount to market value
Bristol House Prices have risen by 13.5% in the last twelve months[2]
1 Buy into a rising market.
There are a number of factors that will fuel house price increases:
- Some rising markets briefly become self sustaining, but this does not last indefinitely. Hot markets attract buyers which in turn raises prices. It is important to ignore the market noise and assess the fundamentals of supply and demand.
- Demand for residential and rental property exceeds supply. This may be caused by an organically growing population, a continued trend of rural to urban migration, job announcements/university expansion, the rising popularity of a city. Supply constrictions are most pronounced in historic towns – where conservation laws are restrictive, and poorly designed cities with little residential stock in central locations.
- Infrastructure improvements/ local regeneration. Public or private investment to improve the quality or connectivity of an urban area results in price increases. CrossRail is a classic example, with homes along the Elizabeth line increasing by a third in the past 12 months[3].
Cambridge House Prices have risen by 15.6% in the last twelve months, the fastest rate in the UK[4] (March 2016 data)
2 Add or create value
- Redecoration. Property value is incredibly subjective. Home buyers want to fall in love and a beautifully presented property that offers them the ‘wow factor’ will often sell above market. Simple and tasteful redecoration can immediately add value. Remember, prospective buyers want to imagine themselves living there – don’t get carried away with expenses and stay neutral with colours and furnishings.
- Redevelopment/ reconfiguration. Study the floorpans of the property. Could you add an additional bedroom? Could that town house be converted into apartments? Would an en-suite bathroom add value? This type of reconfiguration will require contractors and unless you are in the industry it almost always costs twice as much and takes twice as long as you think so build contingencies into your schedules and budget.
- Technical restructuring. Altering lease terms or securing planning permissioncan substantially increase the value of your asset. Developers will be scouring for these opportunities and you need a good technical knowledge before entering into this sector of the market.
3 Purchase at a discount to market value
- ‘Distressed’ Sales/Motivated Sellers. Estate agents are regularly given instructions to sell quickly. This could be due to inheritance, divorce or changes in circumstances. If you ask local agents and aren’t in a rush to buy then opportunities do present themselves.
- Renovation Required. You would be surprised how often properties come to market in a poor state of repair or with serious cosmetic work required. Most buyers do not have the imagination or inclination to see the underlying value potential.
- Off Plan Purchase. Developers will sell properties during the construction of a building, usually at a discount to market value. They do this to assist in the finance of the build and because pre-sales to investors offers a much quicker sales pace. They offer you a discount because you will miss out on rental income for a year or two whilst the property is built. The most important consideration when investing this way is to find reputable developers with a proven track record – there will be a follow up article specifically offering advice on assessing developers.
Birmingham is undergoing unrivalled regeneration. House Prices have risen by 7.5% in the last twelve months [5]
The key takeaway is to pause and consider the market fundamentals before investing. I always encourage clients to treat their property portfolio as a business; and as such there should be a considered strategy in place.
Hands on development is exceptionally time intensive and the best route for the majority of investors is a combination of targeting growth centres, piggy backing on regenerative investment, and buying at a discount to market value.
Case study examples will follow. The next article in this series will focus on the income element of property.
For more information please visit Hewitt-Richards Property Investment:
[1]Land Registry House Price Index March 2016
[2] https://www.hometrack.com/
[3] http://www.homesandproperty.co.uk/property-news/the-crossrail-effect-the-top-elizabeth-line-stations-tipped-for-house-price-growth-a99801.html
[4] https://www.hometrack.com/
[5] https://www.hometrack.com/
Forthcoming posts:
Buy to Let
Finding trusted partners,
My thoughts on future trends
Samuel J Richards
Note: Comments & thoughts are my own and not the views of City Mortgage Solutions Ltd