When only the best is good enough for the investor
Investors have sensed the bottom of the market and they are purchasing property again, says Julian D’Arcy, who believes Yorkshire’s prime locations offer the best buys.
FACED with infinite choice and substantial resources, where would you invest in the property market? Offices in London? Shops in Leeds? Industrial units in Doncaster? Flats in York? Houses in Cheltenham?
Tricky, really, given the diverse views on the strength of the economic recovery, the potential effects of the Government’s austerity measures and the seemingly conflicting statistics being churned out by market commentators.
Probably not a time for putting all of your eggs in one basket – I’d certainly feel more comfortable with an each-way bet at this stage of the game. Definitely a time to be in the game, though, given the opportunities that are becoming available as the banks get to grips with some excellent, but over-leveraged assets and the falls in price that all of the sectors have seen.
This was the dilemma that my business partner, Mike Hardman, and I faced when we left the security of the corporate world and set up Ripley Asset Management, which manages the Longcross Property Investment Fund and acquires property assets for high net worth individuals.
Lots of people like investing in property as an alternative to equities, gilts, cash deposits and gold. It’s tangible, it’s understandable and if bought at the right time, for the right price, generally perceived as a controllable risk.
Unfortunately, it’s also relatively illiquid; the good deals are hard to source, your investment is usually limited to a single or few assets and your investment focus is, therefore, on a very specific area of the property market. Then there’s the matter of managing the assets.
With the fund, we saw that there was an opportunity to create a vehicle that could take advantage of the different timing cycles of the residential and commercial markets, to buy at the optimum time and reduce the risk to investors by investing in a variety of asset classes.
There are plenty of commercial property funds, but, at present, opportunities to indirectly invest in residential property are very far and few between. We now believe there are some excellent opportunities out there for residential property investment and the fund is structured so that people can do that.
The time for investing selectively in residential property has finally arrived after three or four years of unremitting gloom. While it is very difficult to call the bottom of the market, once famously likened to catching a falling knife, we believe that the worst is now over. Here’s why.
When we first began to think of a fund, we decided a combination of commercial and residential offered the most stable platform. We decided that the cycle of commercial initially favoured well-let secondary offices – the best combination of low values and high income. The increase in the value of assets bought to date and the reduction in debt has shown this strategy to be correct thus far. The fund is significantly out-performing its target return.
We now believe that the time is right to start investing selectively in residential property. To begin with, the new housing supply is at its lowest since 1923, with fewer than 80,000 private sector units being delivered.
Even ignoring the effects of immigration, underlying demographics indicate a need for 175,000 units per annum. Putting local and short-term price trends to one side, this will have a positive effect on house prices in medium to long term.
The lack of mortgage finance has led to a significant increase in people renting and strong increases in rental values. Rental occupation is becoming much more socially acceptable, and while people would still prefer to buy, renting is now seen as a valid alternative.
What we look for is a mixture of income and capital growth and we buy with an eventual sale in mind. We will buy in good quality regional centres across the country, ie Harrogate, Chelmsford, Cheltenham and Altrincham. We will avoid areas where there are wider economic problems, ie economy is overreliant on the public sector.
In Yorkshire, generally, you need to be in an urban location in order to capture the rental market, and I would favour the larger, more prosperous, towns and cities such as Harrogate, York, Leeds, Wetherby, Skipton, Beverley, Ilkley and parts of Sheffield. You can get higher yields in less good areas, but I think that there is less prospect for capital growth.
Our fund is favouring family housing, but not very large houses. I think there is a case for apartments in intensely urban locations, such as Leeds and York, but only in the very best locations.
There is definitely a flight to quality, for both buyers and renters and there are reasons to be optimistic about the residential property investment market in Yorkshire and beyond. But it is crucial to be selective and to take advice.
Ten Firs was built to last on a plot with incredible, long-range views to Harewood House and Otley Chevin. The property has five bedrooms and a swimming pool and spa.
PROSPEROUS: Harrogate is a good location for residential investment.