Rental market in London up 25%, surely not?

I was going to start this blog with the following:

I know you are not supposed to give the punchline line away upfront, but the rental market is great.

This though is not a balanced view – it is a one sided view. From a tenants viewpoint rentals are increasing and finding the right property is tough. Things have certainly switched in the last 12 months or so. Early 2009 there was a lot of downward pressure on rents. I believe this was due to increased rental stock – largely from the ‘accidental landlord’ as the press named them – and a general negative sentiment throughout the economy that you can negotiate on anything and everything, especially if property is involved.

So from a business standpoint – both as a landlord and having our London based agency Young London – times are rewarding. This said, it is important to find the balance between a landlords desire to obtain the greatest income (this should not only be focused on rental level but also minimising void – I will come back to this in a later blog) and the tenant being happy with the property. As was the case last year, there still needs to be flexibility on both sides.

In terms of renewals we are currently seeing many increase in the range 5% to 10%. This blog was inspired by a property we have been remarketing which has just gone under offer this week for 25% more than it was rented last year! The landlords response was:

“Very happy – thank you!”

25% is a one off, but I have been saying it for sometime that the private rented sector will play an increasingly important role in the future. If stock levels do not increase simple supply and demand dynamics will take over and rents for the right property in the right location can only go one way.

Many commentators are looking at the government to wave a magic wand to resolve this increasing housing problem, however, you should be looking yourself at ways of helping this sector. I do not want to come across as greedy, however, this is a good investment class if you invest sensibly, it is also good for the economy.

Property Investment – there is money out there

I am pleased to say I am having many more serious discussions about investing in residential property.

Last year whenever a discussion begun regarding investing, there was a bit of a game, nobody wanted to admit they did not have the appetite (or the money) to invest, but it was clear most were firmly on the sidelines. This is supported by the statistics in my blog regarding only 2% of funds announced in 2009 being raised – click here.

There are currently certain portfolios that are doing the rounds and being looked at by many corporate investors. For example, Bank of Scotland have put the portfolio of property bought through Grant Bovey’s failed Imagine Homes property business (mostly held in the Veritas portfolio) up for sale.  This portfolio has a wide range of capital values, rental levels and locations. In my opinion this was a portfolio built up through some kind of flawed financial modeling rather than a clear strategy supported by research and due diligence. Corporate investors are obsessed by the gross to net figures (this means what costs are incurred in running a portfolio, such as service charges, property management fees etc.). IPD (Investment Property Databank) recently reported on the portfolios they analyse gross to net costs represent about a third of gross yield. I would expect for the Imagine Homes portfolio this will be higher, as the portfolio is so widely spread with relatively low rentals. I think the angle here will depend on how desperate the bank are to sell.

The fact that these types of portfolios are being put on the market further supports that there is serious interest in investing in residential property again. This interest is not limited to corporate investors, I am seeing interest from private individuals as well. Clearly, this is good news as the scarce resource currently is funding. There is though some hesitation on what a good opportunity looks like.

Any views?

Residential Asset Mgt for Corporate investors

Young Group asset manages around 350 residential properties for our clients. Most of these are owned by private individuals.

Over the last year or so there has been an increased interest from institutions to invest in residential property – mostly in London / South East. We have been involved in this, including being invited to join a working group run on behalf of the HCA (Homes and Communities Agency). There have been some announcements from the likes of Aviva and AEGON but little new money has entered the field.

However, there are established corporate investors in this field, such as the Grosvenor Estate and Grainger who have invested over the years. We are currently in discussions with these types of investors regarding the asset management side. They tend to use the likes of Touchstone and ARIM for property management and a variety of agents for the tenant finding side.

We take a holistic view to asset management in residential property – you need to focus on both property management and income. Many large scale landlords take a commercial property focus to residential property and focus on property management and ignore the income side. Please do not get me wrong, property management is very important, and with the right focus can increase the level of renewals and reduce voids – a happy tenant is a long term tenant. Good property management can also save the landlord money, knowing a property well means reduced call outs etc. However, without being close to the market, a new tenancy that should be £5 or £10 a week higher and can move into the property a week earlier can have a significant effect on overall income / yields. 

Many regard the secret to residential property investment as buying well, this is important, but so is generating good ongoing income, something that has become even more important in this post crunch era.

The above views come from many years of experience in this field. Sylvana and I have our own portfolio that Young Group manages, along with our clients investments, we give them all the same care and attention. This is something I am pleased to say large scale investors are realising and why we are having more productive discussions in this area. 

Watch this space.

Right to Manage – Block Management – Part 2

Well, last week (12th May 2010) I wrote a blog saying we had instigated a right to manage (RTM) process – click here to see it.

I am pleased to say the response has been phenomenal. I am always a little apprehensive when starting a process like this, even though you strongly believe it is the correct thing to do, you worry whether others will reply and commit money. It’s a bit like having a party then thinking nobody will turn up!

To recap, we (Young Group) wrote to all the leaseholders in a block asking them to support a RTM process. This was due to our belief that a new managing agent would run the development more efficiently with a lower service charge over time. The Housing Association who own a block on the site have already given their support. Well so far, with have had a positive reply from over 60% of the private leaseholders – considering there are over 100 apartments this is fantastic. So we are significantly over the threshold.

What has been pleasing is not only the number of leaseholders that have supported our action but the appreciation that we have taken the lead. Some have given reasons for their support – see below – others have said that they trust Young Group’s judgement that this action is required. Below are some quotes from the comments leaseholders have given (without our asking for views):

“XXXX [current managing agent] have been utterly useless in just about every respect and I’d be very happy to see them go.”

“They are a disgrace [the current managing agent]. They never responded to emails or voicemails. I actually got in contact with the Ops Director directly to get a response. They also told my mortgage provider that I hadn’t paid them monies which my mortgage company then paid but also took money from me for the same payment. This is taking hours and hours of my time to resolve, made worse by the fact that XXXX are denying they ever contacted my mortgage provider (my mortgage provider has sent me all the details). The sooner they are rid of the better.”

“I will go with whatever you recommend.”

“You only have to google the name [of the current managing agent] to read half a dozen horror stories of excessive charges and tardy or otherwise inadequate responses to customers’ communications.”

“As I have never been impressed with XXXX [current managing agent] I am very willing to support you on the RTM.”

“They have been given a chance and resoundingly failed. Thank you Young Group for taking the baton and dealing with it – you have my full support as always!”

Some strong feelings out there.

To be continued . . . why not sign up by subscribing – on the right hand nav below tweets.

Capital Gains Tax and Private Rented Sector

“It’s not fair!”

“Why do they do this?”

“We are only trying to plan for our retirement.”

These will be sentiments that many investors will be thinking (and may be shouting about) in regard to the expected increase in capital gains tax (CGT). However, there has been an inevitability about this increase. There was a surprise that this was not in the recent budget – many predicted it would be. There was also surprise a few years ago when the government cut it – we seem to have a case of “as you were.”

It is very frustrating that rates change, although we don’t complain when it goes down! In most cases investing should be a long term strategy – this is particularly the case with property – and therefore consistency is important.

However, the fundamental issue here is the use of tax to support (in this case not) government policy. There are numerous reports that show that a growing number of people are unable to afford to buy property and find the private rented sector an important part of the UK housing stock. This view is supported by the British Property Federation (BPF), its chief executive Liz Peace said:

“Buy-to-let landlords and individual investors will bear the brunt of this 22% tax rise and, while the public at large may have little sympathy with those profiting from property sales, ministers must recognise the massive contribution that these people have made to housing supply over the last decade. Over a million more people rent now than in 2001 and this has been made possible through buy-to-let investment.

I noticed recently that the ‘famous’ maths teachers from Kent (Mr & Mrs Wilson) who bought up a portfolio of hundreds of houses were saying they were selling earlier than expected partly driven by the low CGT rate at the time. I suspect it was actually less to do with the low rate, and more the fact that they expected it to increase – that feels like an oxymoron but does make sense!

So we are back with a CGT rate in line with a few years ago, I hope when we see the detail there are mechanisms to support the long term investment in the private rented sector through say taper relief.

Right to Manage – Block Management

Last friday we sent out a letter regarding ‘right to manage’  to leaseholders of a block Young Group co-invested in with our clients a number of years ago. Below is the main part of the letter – I have blanked out certain names for confidentiality reasons:

“Dear X,

I am writing in reference to your investment in XXXX that we manage.  As you will know, at Young Group we take this role very seriously and are always looking at how to enhance your asset’s value, be that through your rental income or capital value.

An area that many people do not monitor is the way the fabric of the building is maintained; are the communal areas looked after, is security good and how responsive are the block managers?

NB, Young London manage everything in your apartment inside the front door, the block/managing agent look after the communal areas of the scheme.

This letter concerns the performance of the block managing agent.

Through the work of our estate agency, Young London, Young Group has been acutely aware of inefficiencies and shortfalls in the block management at XXXX.  Aside from concerns regarding the day-to-day management of the block, of particular concern is the managing agent’s slow speed of response to issues. We have also been advised that there are costs within the service charge that are high, especially regarding the insurance of the block.

With these concerns in mind, Young Group is recommending that leaseholders at XXXX carry out a Right to Manage (RTM).  It enables the leaseholders (you and me) to appoint a new block managing agent of their choice, rather than the choice of the freeholder (who in this instance own the current managing agent).

Right To Manage (RTM)

All leaseholders are entitled to join the RTM company. We require over 50% of leaseholders to support this action to change the block managing agent.

The private Residents’ Association (RA) and the Housing Association (HA) in XXXX have both already lent their support to the Right to Manage and to appointing a new managing agent for the development.

It now requires the support of our investor leaseholders.

Initiated by Young Group, both the RA and the HA have held various meetings and have selected Chainbow as their preferred managing agent.

Chainbow is an experienced property management company that has a robust track record – we have worked with them for a number of years and they are managing agents of other schemes that we are involved in.  Chainbow has long campaigned for leaseholders’ rights and raising standards of transparency in service charges in the residential property sector.  More information regarding Chainbow can be found at www.chainbow.com.

 The Cost

A contribution of £25 plus VAT (£29.38) per leaseholder is required to join the RTM company.  This float will be placed into the RTM company accounts to cover expenses involved during the process of setting up the RTM company and the legal process of appointing a new Managing Agent.  Any surplus at the end of the process will be returned.

 The Next Steps

In order to change the Managing Agent over 50% of the leaseholders in the block must join the RTM company. To reiterate, in our opinion the benefits will be both financial (both through lower service charge in time and enhancing overall value of your investment) and better service.

 If you are in agreement, there are 2 steps that need to be taken:

 1. Payment is required For ease of administration, £25 plus VAT can be collected from your tenant’s next rental payment

2.  Written Agreement that you are happy for the legal process to get underway. To formalise your response to this email, please email the following wording to XXXX:

 “I agree to participate in the formation of a right to manage company for the running of XXXX and to become a member thereof.”

 NAME:

APT NUMBER:

 There is a set legal framework to follow and we will of course keep you updated with progress of the RTM formation and changeover of managing agent.  In the meantime, should you have any questions, feel free to contact our Property Manager, Christo Du Plessis at the Young London office on +44 (0) 20 7593 3300 or your Portfolio Manager.

 I very much look forward to a successful and smooth transition process that will result in XXXX being managed in a more cost efficient manner and to a higher standard for the benefit of all of us who have invested in property at the development.  I look forward to your support.

 Kind regards,

 Neil Young

CEO, Young Group”

I will write another blog shortly regarding the support we have had and the comments that have been written. Young Group takes it role of managing our clients assets very seriously, this is another example of that.

To be continued . . . why not sign up by subscribing – on the right hand nav below tweets.

10 Downing Street Heads for HMO Status

Last Friday with everyone looking at the election results, I decided it was time to look at the quirkier side of the result. We (Young Group) put out a press release which related to the result and a recent change in the law. See release below:

With no clear winner emerging from the closest fought election in 80 years, should the leaders of the three main parties decide to bunk up together in 10 Downing Street, they’ll need a change of use planning application…!

Neil Young, CEO of property portfolio managers, Young Group, points out; “Under new rules rushed through the Commons before the dissolution of parliament – and without the usual consultation process – houses occupied by 3 or more unrelated parties now need to be reclassified as House of Multiple Occupancy and require a change of status.  Perhaps more thought should have been given to this ill-conceived change in legislation that many in the industry are lobbying to be overturned.”

End

I am glad to say the media took this is in the right way with both the main property magazines – Property Week and Estates Gazette – including the quote on their websites. There is a lot of pressure to change this law, it does feel like a sledgehammer to crack a nut.

Looking at a development site . . .

It’s great to be looking at development sites again.

It feels like there is a little more life and interest to build new residential schemes again. The leaning of many developers is towards houses with gardens and a front drive. However, within travel zone 2 in London the order of the day is flats. In the current market this tends to be small schemes. This is what I tend to invest in.

I am looking at a scheme at the moment. I do my usual walk round the area, see what local agents are saying, and take in the surroundings. There is no substitute to wearing out a bit of shoe leather. Google maps etc are really useful but seeing an area first hand is imperative.

Research is so important. So before I go out I will look at comparable schemes in the area, review what we have previously been involved with nearby, make some calls and search on the web.

Then its the spreadsheets to analyse the financials. As always, and may be because I am accountant, I tend to look at the downside first. It is a natural instinct, it is very easy to put high prices on the sales side and make the returns look attractive, but in the long term this does not make sense. When you are speaking with a client about investing you want to be able to detail why this is a scheme that is a good long term investment.

I would summarise my thoughts then compare with colleagues. Investing in a development is not something to be taken lightly, I would always have colleagues do their own due diligence and then compare.

Ultimately, Sylvana (my wife, surveyor and Young Group founder/COO) and I both have to agree that a development should be invested in, if one is unsure we will not proceed. The question we always ask is whether we would hold a flat from the development in our own portfolio, we need a unanimous yes on this for us to proceed.

The last few years have shown to me that investment agents are keen to sell to you but less keen to help when the going gets tough. Next time you are investing, ask if the company involved will have a personal involvement for years after completion, mine does.

Funds fail to raise monies

2009 certainly was the year for talking big numbers – and then failing to deliver.

No, I’m not talking about the budget deficit but property ‘recovery’ funds. I think branding departments decided that the word ‘recovery’ was the ticket to raising money. What they did not realise was that people are a lot more savvy. Claer Barrett has written articles on this topic in the Investors Chronicle and Financial Times over the last week – kindly quoting me in the FT one!

According to her research, out of the £770 million targetted only 2% was raised. I must admit to thinking last year we kept hearing about these big funds but then never heard about them buying anything. I think there is a lot of cynicism around about funds. They have significant commission structures, and in many cases performance poorly. A few years ago at Young Group we spoke with clients about setting up a fund to raise money to buy land to then develop. The feedback we received was people were happy to invest in residential property but prefered to invest in an individual property (through Young Group) rather than put money into a fund.  This is one of the reasons we have taken the approach mentioned in a recent blog – Funding new residential developments.

I think a classic example of the issue of funds relates to a recent example when one of the large pension funds sold a commercial building in early 2009 for £21m as the fund valuation had fallen and therefore to satisfy the terms of the fund had to sell. However, within about 12 months as the market values have been seen to recover the fund bought back exactly the same property with the same tenants for £31m. A nimble investor made a very healthy profit, however, I suggest private investors who have put in hard earned money have lost out.

I have never been a fan of funds – the only ones I do think are worth looking at are when the fund managers have invested their own money. There is no substitute to doing research and working with advisors who co-invest.

Sport, Property and Business

Sport has very much become a business. I have not been in the boardroom of a (Football) Premier League Club, but I expect the majority of the meeting is about areas other than the results on the pitch – except may be how it affects the bottom line.

Property I suspect takes up a significant part of the meeting; whether you look at Arsenal and the redevelopment of Highbury or Leeds where I understand Ken Bates is looking at replicating the leisure facilities he had built at Chelsea.

The similarities between sport and business fascinates me.  In team sports, the manager is doing everything possible to cover all eventualities such as tactics, players and injuries, etc.  In business the CEO or departmental head is doing the same for his/her company. For tactics, business people will probably talk about strategies, for players; the importance of the team, and injuries I guess a fit and motivated workforce.

The comparison for property – may be more so in development/investment – is having a good plan and strong foundations. In sport there are freak results, The Netherlands beating England in the cricket world cup last year and Greece winning the 2004 European Championships – but these are in a minority. In property there are surprises as well, may be where an unknown company owns a piece of land that unexpectedly obtains planning permission.

I am a keen cricket fan and often see great similarities between cricket and running a business/property investment/development company. A five day test match can have many twists and turns, some outstanding individual performances, but usually the most consistent team will come out victorious. In business we talk about strategies and tactics, it is fascinating in a test match (as in many sports) to know when to change the tactics (say to become more attacking) whilst still being faithful to the overall strategy. This is also true in business.

Generally in sport, business and property a clear and coordinated approach and dare I say long term strategy is critical.