Hello readers,
Let’s face it. Property is, when viewed short term, could be seen as an unstable investment choice right now.
The question is, what investment avenue is a good one at the moment? I was recently reading an article from earlier this year in The Guardian which highlighted how “big providers [are] telling older customers their funds have plummeted by 20% or more over the past 12 months.”
Here’s the thing right – the average pension pot for a 65 year old today is around £190k and with a 20% drop in value, that’s a loss of nearly £40k over the past year!
Pausing just for a minute before we look forward, if we compare that to property you will see how a crude calculation shows that even at 6.5% mortgage interest rate you can end up with positive cashflow and asset value growth over the past 12 months*:
- Medway terraced house value June 2022: £232k
- 25% Investment required in June 2022: £58k
- Medway terraced house value June 2023: £234k
- Equity left in property June 2023: £59k
- Cashflow generated after a mortgage at 6.5% assuming a £1,200 pcm rent: £3,084
I’m certainly not saying that property should replace a pension, but it should certainly form a significant part of a diverse investment strategy.
Here’s the thing though. Property is for the long term – I always advise investors to be in the game for ten years minimum and after this time, things start getting interesting.
Whilst we’re seeing landlords selling up more than ever, this is because they are either over leveraged, have not increased rents annually, caught up in section 24 reforms or are simply wanting to unlock funds for other purposes (perhaps worried about legislative changes coming down the line as well). The first two are entirely preventable and the second one has options if you have enough time in the game, so it’s not all doom and gloom right.
What is my take on the Medway property market over the next decade? Let’s consider some of the facts:
- People will always need a home to live in
- Supply will probably become tighter due to government legislation, driving demand
- As house prices continue to grow, rental demand will naturally increase from ‘generation rent’
- More ‘casual landlords’ exiting the market will continue to stoke demand and even create opportunities for those with capital
This is all good news right – and certainly it should be for investors who ought not be put off by the media’s scaremongering, but seize the opportunity of a swing in the supply / demand imbalance and strategically look to expand (particularly those younger investors with time on their side).
House prices
Where will Medway house prices be in the 2033? Let’s look back and then gaze forward for single let terraced houses.
Looking back
- Medway terraced houses in June 2013 were worth £141,073
- Medway terraced houses in June 2023 were worth £234,373 (that’s a 66% increase)
Gazing forward
- Applying the same % increase over the past decade, Medway terraced houses in June 2033 will be worth £389,059
- Applying the increase of the same value, Medway terraced houses in June 2033 may be worth £327,673
- Applying a safe average growth of 2.5% per year, we end up at £440,804
Either way, we’re looking at growth of c. £9k – £20k (or £777 – £2,720 per month) and that’s pretty decent when you think about it. This doesn’t even include the rents which will naturally increase with demand.
Rents
Where will we be with rents I hear you ask!
This is the thing as unless you’re releasing equity from the property for future investment (which is always the wise decision) your mortgage payments are likely to stay pretty similar meaning rent increases will add profit over time.
In a blog I wrote back in August 2022, we see how Medway rents have increased by 40% over the past decade. Now that’s a significant sum and if we apply this to the £1,200 pcm approximate rent of today that makes a single let rent around £1,800 pcm in 2033 (beating the BoE inflation target of 2.5% by c. £300 per month).
It’s quite simple; increased demand and legislative requirements equals increased rent and generally improved returns over time.
A more professional approach
This is one to watch and what will sort the successful investors from those who simply can’t get it right.
There will undoubtedly be increased legislative requirements and with these will naturally come more costs. An article I read from Property Insider hit the nail on the head by saying that:
“The regulatory and taxation burdens of running a rental property will be significantly higher than today. Extra costs will be partly covered by increased rents, but probably not entirely. Landlords will need to monitor their profit margins carefully.”
This is the thing – property is no longer a way to earn a quick buck. It’s about running a business and getting things right over the long term. Those who do this successfully are those who will still be investing in a decade – those who don’t are likely to have sold up (possibly at a loss).
Hasan
*Data taken from land registry on 27th August 2023
