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Investing in London property

Investing in London property is not for the faint-hearted. The colossal cost of homes in the capital is enough to put many investors off outright, and because of the outlay required, the yields don’t trend as high as they do in other, cheaper parts of the UK. But something draws investors, both local and foreign, to London property in droves.

The value of London property

The same feature of London property that leads so many to avoid it is its chief appeal.

As we’ve stressed before, gross yields are at best a quick comparison tool – a back-of-a-matchbook calculation that takes into account only the property value and the annual rent. It doesn’t account for purchase costs, expenses or – the big one – capital appreciation.

If you fancy a little bit of etymology: the phrase “safe as houses” is thought to date back to the 1840s, when a flurry of speculative investment in new railway companies was followed by the decisive ‘pop’ of a bubble. People turned their attention back to more tried-and-tested forms of investment, such as property, where capital appreciation is slow but sure.

A mortgage may well last a couple of decades or more. And in that time, though damage, depreciation and the occasional pesky recession might weather at the immediate, relative value of a home, the long-term trend is upwards. For London property, this is especially true.

Between the onset of the 00s and the pre-recession property price peak, the average house price in the UK rose by 125%. For the UK as a whole, this amounted to an increase of about £100,000; for London, the figure is almost double that.

And then there’s how London fared during and after the recession. Like everywhere else, the average house price in London fell by about 15% throughout 2008 and the early part of 2009. But whilst the rest of the UK has seen only a modest and haphazard recovery, London started dusting itself off as early as mid-2009 and has since equalled its inflation-adjusted, pre-recession peak.

(All house price figures used in these calculations came from the Land Registry’s House Price Index.)

So, is London property recession-proof?

This sort of investment is called ‘speculative’ for a reason. There’s no sure-fire way of guaranteeing that it will be successful, and no investment is 100% risk-free. And there are those who anticipate that the current alarming acceleration of property prices in London will lead to an even more devastating crash in the near future, one from which it will be even harder to recover.

So in short, no. London property is not ‘recession-proof’, though historical house prices show that it fared a darn site better than anywhere else in the UK during the last one. For those willing and able to shoulder the added cost, however, there are steps you can take to make sure the investment is as solid as possible.

1. Invest for long-term gains

Whilst it’s possible to invest for income in London – premium corporate lets in the City are a good example – Greater London property is almost always better suited to a long-term plan. In the short term, the property only needs to pay for its own running costs and mortgage repayments. The returns will come later, either in the form of an unencumbered income or a sale.

So it’s important that you have a long investment horizon, and important that you can service a couple of decades’ worth of buy to let mortgage debt without necessarily deriving an income from the property.

For more information on the differences between growth- and income-based investments, see this article.

2. Choose the right area

I like ‘Location, Location, Location’, but I don’t feel that the title does enough to emphasise the importance of Location.

Investment in London is spreading outwards, largely because fewer and fewer investors can afford to buy Central London property. Many of the suburbs are investing in infrastructure development, such as new transport links, and buyers who find property in these areas slightly ahead of the curve (i.e. before the inevitable surge in local prices that come with the new accessibility and industry) are sitting pretty.

3. Choose the right property type…

An addendum to this one: “…and market it to the right type of tenant.”

Traditionally, detached houses gained and held value better before the recession. After the recession, there hasn’t been much in it aside from the added cost.

Terraces and flats are cheapest, and it’s common to see Victorian terraces in London converted into two or more separate flats or maisonettes. Larger properties can also be converted into HMOs (Houses in Multiple Occupation) to let to sharers – either on a joint contract or room-by-room basis. The latter is more popular in London, as young single professionals tend to move from house-share to house-share as they settle into a career. You benefit from separate rents, but also face the downside of often-complex HMO regulation as well as short-term tenancies. See our article Letting to sharers for more information.

Always remember to do your research when buying a property. Look into average local rents and incomes to make sure the rent you charge will a) be affordable for your prospective tenants and b) cover your costs. If you find yourself unable to service your debt without pricing yourself out of the local market, you may have to look elsewhere or try to forward a little bit more money in order to lower your ongoing buy to let mortgage costs.

4. Buy below market value where possible

Many landlords and small-scale developers make good money finding BMV properties in need of renovation or refurbishment and doing them up before letting (or selling) them. Many such properties can be found at auction, disused or repossessed and in need of some ol’-fashioned TLC.

The downside of such properties is that they tend to be deemed uninhabitable in their bought state, and so many buy to let mortgage lenders won’t finance them. As such, the property auction was always traditionally the territory of the enviable cash buyer. Nowadays, however, there are myriad alternative finance options available: bridging loans have come into the mainstream as one of the favourite forms of short-term loan and are perfect for this sort of investment.

5. Avoid over-gearing

Of course, there’s no hard and fast rule for property investment, and a lot of landlords can find great success with heavily geared portfolios, even in London. But with the sheer amount of capital at stake, there’s no harm in hedging your bets.

Prices dropped by about 15% during the last recession, so the average high LTV buy to let mortgage will still leave you with enough equity in the case of a repeat performance. But the lower the LTV, generally, the better the interest rate; and with the possibility of a base rate raise just around the corner, minimising the potential impact should be a priority. As your investment goal is likely also for future gains rather than income, if you are able, you might also consider a repayment mortgage.

As stated, the above list is not definitive, and you might find that a completely different investment strategy works for you. But investing in something as expensive and volatile as London property warrants a degree of care and a great deal of preparation – if you’re willing to put in the time and work finding the right property and right buy to let mortgage for it, you’re already off to a flying start.

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Amelia Vargo is an online marketing executive for CT Capital. Amelia writes for Turnkey Mortgages, Turnkey Landlords, TurnKey Bridging, TurnKey Life and Commercial Trust.