Safety in Numbers?

Good property investment decisions are invariably based on accurate data and rigorous research. And that’s quite proper because buying a BTL property can be one of the most important financial decisions that many families and individuals will ever face. A well-researched choice can help to secure long term financial stability but, conversely, a poor choice can mean squandering years of hard-earned savings. In a business as serious as this, there’s absolutely no room for gut feeling.

This is the reason why so much of Solomon’s work involves numbers. As in investment house, we look at a whole raft of data when considering which properties we should draw to the attention of our clients. We look at property prices, of course, and at other obvious concerns such as the rents typically achieved by similar properties in the same neighbourhood. We study average void periods, letting agency fees, the likely costs of maintenance and so on – because these numbers have an immediate bearing on yields and profitability.

We also look at longer term considerations. Inward investment can have a big influence upon a district’s fortunes, as can demographic factors such as the size and average age of local populations. Investment conditions can also be affected by the growth or contraction of local employment, the health of the local economy, the size of the area’s student population and so on. These numbers can all have a bearing on longer term rental demand and, thus, upon the sustainability of yields and ongoing capital growth.

As regular readers of this blog will know, we also pay close attention to national and regional forces. We examine sources of economic instability, government policy, taxation and the role of the Bank of England in setting the base rate of lending, as well as more nebulous factors such as market sentiment. These play a significant part in establishing the broader trends – the economic landscape on which all such investments play out.

It’s no surprise then that serious investors pay close attention to numbers. First time investors can sometimes find themselves swayed by a property’s appearance and gut feeling – the sort of factors they might consider if buying a property as their own second home – but this is a misguided approach. Successful investment is all about the long term financial returns; regardless of a property’s sense of charm or outward attractiveness, what matter most are yields and capital appreciation. In the absence of an infallible crystal ball, all investment will carry an element of risk but to keep exposure to a minimum, the professionals always make the best possible use of market data.

Clearly, the numbers really matter. However – and this is an important point – there is also a limit to the usefulness and relevance of numbers. To explain this, let’s consider a couple of examples.

Looking at the fundamental forces of supply and demand, few would doubt that there is a substantial under-supply of affordable homes in Britain today. Look at any national statistics and you’ll quickly arrive at the conclusion that demand far outweighs supply – and that it will continue to do so for many years to come. In a free market, that leaves prices with only one way to go and that’s up. Surely, then, that can only spell good news for investors?

Well… yes and no. Let’s look at another set of figures.

The gap between rich and poor has been widening in recent years and nowhere is this more evident than in the clear gulf between property ‘haves’ and ‘have-nots’. Increasing numbers of young people are being forced to stay with their parents, and many of those same parents are feeling compelled to help their children onto the property ladder even when they themselves are struggling financially. The government regards this as a national crisis and continues to examine ways in which it might help to close the affordability gap. We’ve looked at the question of affordability in previous blog posts and the numbers show very clearly that property is more expensive now than at any time in living memory. That supports an argument that property prices cannot keep outpacing average earnings forever, so – ultimately – they must surely be set for a fall.

In London, where prices have been inflated almost beyond the realms of reason, there may be some weight to this argument. At the end of April, The Telegraph reported the view of one London estate agent who said prices in the capital “needed to come down at the top end of the market by up to 30% in some cases.”

So here are two conflicting arguments: one saying that prices must continue their inexorable rise; the other saying that, in certain markets at least, prices could be poised to fall. Both arguments can be supported by credible numbers, so where does that leave the investor?

The way out of this apparent conundrum is to consider one all-important fact. The UK property market does not operate as a single, homogenous mechanism. In many respects, it does not exist at all; in its place stand hundreds – arguably thousands – of local and sub-regional property markets, each with their own strengths, weaknesses and foibles.

Looking at national statistics can so easily create a mood of optimism or pessimism – depending on the headlines of the day – but whilst it pays to be aware of these wider factors, they should never blinker a serious investor. Even in the worst market conditions, there are often excellent deals to be had – although finding them takes effort – and, because property investment is best regarded as a long term venture, short term fluctuations and their associated headlines should not be the chief concern. Working only from averages is no way to identify a good opportunity; what is needed is focus.

That focus should take the property investor’s attention down – not just to the city level, nor even to a particular neighbourhood – but right down to an examination of individual properties and whether they can satisfy local demand whilst delivering a healthy profit. Yes, the purchaser must be aware that mortgage interest tax relief will see margins eroded next year but potentially more important are questions such as the property’s maximum yield potential, the associated investment and maintenance costs, the reliability of local demand, and the prospects for any economic growth to percolate through to the immediate neighbourhood.

Once again, we return to the study of numbers – but these are numbers of a very different kind. These are not the broadly averaged statistics bandied about by ministers, trade associations and broadsheet journalists; these relate to the marketability and the profitability of individual properties. No newspaper (or blog article) can ever deliver that necessary level of detail – only specialists with a detailed understanding of the local market.

And that, of course, is where a good investment house can really make itself invaluable. It won’t have an intimate knowledge of every local market but it will know exactly how to go about accessing it and it will conduct all the research necessary to ensure that investments are as secure and free from risk as possible. In essence, the role of the investment house is to make sure that customers have the very best data available to them and, crucially, that all those numbers make sense.