Guernsey Press

Property still sound long-term investment

Simon Brown, head of private client lending at Investec Specialist Bank, takes a look at the property lending scene five years after the global crash that was, at least in part, caused by over-aggressive property lending...

Published

Simon Brown (pictured right), head of private client lending at Investec Specialist Bank, takes a look at the property lending scene five years after the global crash that was, at least in part, caused by over-aggressive property lending...

*

Where are you seeing property investors placing their money?

In the main people stopped investing in property during the downturn and the old adage of 'cash is king' ruled. There was a lack of confidence brought on to some extent by negative press reports in the UK but also by the lack of finance available.

As a result, many people wanting to invest in property did so in small personal projects in their homes, rather than purchasing new property assets as investments.

However, Guernsey's residential property market has stood up well compared with the UK and Jersey during the last five years.

Despite uncertainty in the local housing market, due in most part to tightening of lending, which also occurred here as a consequence of the dislocation of the credit makers, property continues to be one of the better long-term investments.

According to States figures, the mix-adjusted average local market property price has risen by 20% from Q1 2009 (£369,761) to Q1 2013 (£447,628).

This is no mean feat compared with much of the UK, which has seen a loss in value over this time, and would indicate that residential property in Guernsey has been a worthwhile asset and continues to be.

What are investors doing with their property to reap the best possible profit?

Buy-to-let mortgage loan-to-values decreased in the past five years and until recently it has been difficult to get funding. Even now, the loan-to-values are significantly lower than the heady pre-2008 days. In some aspects there is still an element of a lack of confidence in the property market, but it is returning.

According to the States' annual supplementary property bulletin 2012, the average monthly rental growth of three-bed houses increased in Guernsey from £1,800 in 2011 to £1,900 in 2012.

Opportunities still exist for investors considering refurbishing properties but this market is seen by many lenders as having greater risk than buy-to-let transactions.

The number of financial institutions funding refurbishment projects is much lower than the number prepared to fund buy-to-let transactions, which has in turn led to increased costs of borrowing for these projects.

We are still a long way away from the 'good old days' between 2004 and 2007 when you could flip a property in six months and make a healthy profit. Growth is steady and finding the right investment property is the key.

Is property still a decent, long-term investment for those seeking benefits from a tangible asset?

The rental sector is likely to stay strong over the next few years as potential first-time buyers take a wait-and-see approach and are happy renting good quality properties.

Would-be buy-to-letters must keep an eye on interest base rates. They should be aware that if they do rise (the average 2008 base rate was in excess of 5%) they may not get the yield to cover the mortgage.

The consensus is that residential house prices are likely to remain stable for 12-18 months followed by a pick-up in activity levels as market confidence improves and investor demand returns.

Are banks ready to lend again?

There is no doubt that availability of bank lending has shrunk. The number of UK banks has fallen due to market consolidation, such as the merger of Lloyds and HBOS.

We have also seen the exit of many of the institutions that drove the growth of the property market – it may be some time until we see the Irish banks lending significantly again into the UK market.

In addition, the banks that do exist have cut back their appetite for property lending and will only do so at lower loan-to-values and only for the right client who can meet, in some cases, rigorous financial hurdles.

Banks that are serious about lending in this market will, for the right client, provide well defined, flexible terms and cater for those with irregular income flows, (which may take the form of bonuses, profit shares or dividends) and those who find it difficult to obtain larger mortgages, despite having significant personal wealth.

What are the banks now looking for when it comes to lending?

Banks will monitor the use of their funds more closely, particularly when it comes to refurbishment or development projects.

They are being choosier – looking at the experience and track record of the client in relation to the proposed use of the funding.

Banks will also analyse location of property a lot more closely and want to better understand the strategy for the investment.

The property finance market is returning and will continue to do so. An individual with a good financial track record and a sensible funding request should be able to gain acceptable loan terms from a bank, albeit they may take longer to find.

Sorry, we are not accepting comments on this article.