‘Too soon’ to buy UK property

Prices have further to fall, experts say WITH reports of further significant residential property price declines expected in the UK, South African investors may wonder if this will present an excellent opportunity to buy property offshore.

Ultimately that depends on whether the investor is taking a short- or long-term view on the residential property market there.

David Green, MD of residential, office and industrial property brokers Pace Property Group, believes the market in the UK will see further declines and that investors should consider waiting until the market stabilises again. “Investors should review the market in a year’s time.”

Green says there have been a lot of UK properties marketed globally and in SA in recent months and while he is “not saying they are not a good buy”, if the UK market was strong these products would “not need to go further than the UK”.

Green says that according to a June UK housing report from Capital Economics, residential property prices in the UK are expected to fall by a further 35% by 2010. He says the UK market has already fallen 15% over the past year.

“The concern would be that there could be an oversupply of rental properties in the foreseeable future.”

Green says the UK residential market has always been one of the more obvious investment avenues for South African investors looking to diversify offshore. Historically, the market has performed “exceptionally well” with properties at times appreciating by 25% a year over the past decade.

Scott Picken, CEO of International Property Solutions, which markets residential property in SA, Australia and the UK to the residents of these countries, says that while in the next 12 to 18 months the UK residential market could be flat or experience some price deflation, there are “great opportunities in this time”.

“You must choose each property on its merits,” says Picken.

He says that in the short term, market sentiment can cause uncertainty, but that if an investor is taking a medium to long-term view, then it provides a “fantastic opportunity get into the market now”.

Picken says he bought his first house in London in 2002, at a time when “everyone said I was absolutely crazy”. “We had just had September 11 (terrorism attacks) and England was going to war with Afghanistan and there were oil price shocks and inflationary pressures.”

But he bought a property in a good area with “good cash flow” and he had a “medium- to long-term view”. It took 18 months for confidence to come back into the market. “That investment has always been a good one. No one can ever call the top or bottom of a market and one needs to make investments based on fundamentals.”

Picken says there is demand for 210000 houses a year in the UK and only 170000 are being built. “Supply and demand are out of kilter and while that continues there will be a strong rental market and capital growth.”

He disputes a reported significant drop in residential prices, saying it is more a case of the rate of mortgage approvals plummeting than anything wrong with the market. This is a result of the global banking crisis sparked by the US subprime fallout.

“The number of mortgage approvals from March 2007 to March 2008 has dropped about 50%. For the next 12 to 18 months, until banks get control of their finances and can bring finance products back into the market, I reckon transactional volumes could drop to 17% of the volume done in 2007.”

He says price decreases of only 0,8% were reported in the past quarter and there were price increases of 5,2% if the past 12 months were taken into account.

“There are no buyers in the UK at the moment because buyers can’t get access to finance, whereas South Africans have historically only been able to get 70%-80% mortgages in the UK because they are nonresidents. Therefore they still have access to the market.”

Picken does not think the UK property market will crash, saying economic conditions now are different from 1991, the year of the worst crash on record. In 1991, prices fell 11% after prime interest rates rose to 16%.

“People couldn’t afford their properties and they had to sell and this brought the market down. Home owners wanting to sell were left with negative equity.”

He says the fundamental factors that influence the direction of property prices include unemployment and interest rates. Picken says interest rates appear to have peaked at 5,75% last year and by February this year had moved down half a percentage point.

“It looks like interest rates should continue moving down. But rates may stay static because of worries that dropping interest rates further will cause a spike in inflation.”

He says a record 29,4-million people were in employment last year and 65 successive quarters of gross domestic product growth had been reported.

“Although the world economy is uncertain, there is nothing on the horizon pointing to significant unemployment in the UK.”

Property economist Erwin Rode, of Rode & Associates, says three main criteria should be considered in buying property overseas. The first is whether the investor’s income is greater than his interest on the mortgage bond.

Second, the individual concerned must “take a view on the external value of the rand”. A third consideration “is whether it is not too early to buy overseas now”.

“I don’t think we are near the bottom of the property cycle overseas. And it’s pretty certain that the rand will devalue over the next few years.”

Article from: www.businessday.co.za