The Inside Edge
Last week we thought about buy to let, and whilst that suits certain investors one of the real issues that’s been pondered increasingly is that of institutional money finding it’s way into residential investment.
Commercial property is a safer bet, at least in terms of a solid income, and simpler to manage. Most tend to be for 15 years with the tenant responsible for all rent and rates as well as insuring and repairing the premises. With luck the investor gets the rent paid, upwards only rent reviews and is handed back premises in re-lettable condition. Capital growth is of less concern than income.
Residential letting is a different ball game. Tenants come and go more often, with attendant void periods. Management is often of the micro variety and there’s little control of how the place will look when you get it back. That’s before legal issues around tenants not paying or leaving are taken into account.
Whilst there’s more protection for residential tenants now landlords can still be at the mercy of rogue letting agents who still don’t (yet) have to belong to a redress scheme or be licensed. Good management is not cheap and as usual you do tend to get what you pay for and this cost eats into the bottom line. It’s certainly higher than with commercial lets.
The holy grail of course, and never has so much money been crying out for a good home, is the potential capital growth, and seeming rent increases, available to small time landlords. Of course both capital values and rents can go down, as was seen a couple of years ago in London when both dropped dramatically, but overall the inexorable rise in capital values is enough to drive money into this area.
One fly in the ointment here is that traditional volume landlords have learned long ago that they don’t do this for income, long term capital growth has been spectacular. In an ideal world rent pays any finance costs and upkeep as of course every few years the property will need updating. This is fundamental and has held institutions back. But the gains these landlords have made, just look at the number of property people in the rich lists, have been enviously watched for many years.
My company seeded and started a fund three years ago (great timing eh!) in only prime property, and given that we have over 50 years experience of managing such investments it’s been a success because we know what we’re doing, but has still been hard work. Money is still slow to come in as for some reason the FSA has said that a property fund with ANY gearing (ours has 20%) is a “risky” one. However, it has shown that efficient management is the key, and for any institution looking to start a purely residential fund it is the key.
Sourcing property for investment is also a headache and I was heartened to see an entrepreneurial company looking to help potential investors. Rankdesk (www.rankdesk.com) is currently something of a blunt tool but it seeks to rank properties with the kind of criteria used by potential tenants, i.e. closeness to transport, lift, condition etc.. With take up the efficacy will improve and become of real use, and given that finding investment property is still rather akin to sticking a pin in a map it could be the first step to genuinely helping people invest.
As for the players that control the really big money looking for a home in the resi world, they’re circling, but where will they land.