11th May 2007

Brown Market Housing

A few years ago you would have to suffer some dreary chap at a dinner party going on about how he had just purchased five buy to let flats “off plan”; now that seems to have changed. From just a few flats and a bit of borrowing, it is rather worrying when you now see the amounts being lent out to these amateur landlords. Of course, some have done very well but many others seem to be blissfully ignorant of the risks they may be running.

Questions such as void periods for rent and vanishing tenants are apparently issues that never come up. Calculations as to the real profit from such financial arrangements seem to be few and far between and seemingly there is very little due diligence actually being carried out.

Generally the experts tell us that there seems to have been little opportunity for investors to make a reasonable profit out of just rental, with rather any profit actually coming from the capital growth in the value of the underlying property. In fact the average “net yield” on residential property, that is to say rent as a proportion of the building cost, is now as low as 3.5%. Now if that has occurred because you have seen a dramatic rise in your property values, then that is excellent: however if you are investing at these capital values for that somewhat puny yield, then perhaps the more profitable and less risky online bank account may proffer higher returns at significantly less risk and cost!

So have we seen the best and is the party actually over? Well not according to the lenders. Quite a few of the lending banks seem to be more than happy to raise their maximum lending levels to an almost industrial level. Bank of Ireland for example has raised its maximum lending to an individual from a mere �£2.5 million up to �£20 million. Others are following in a rush to join in this lending fashion. Last year a total of 330,000 buy to let loans were taken out – a rise of 57% over the previous year, and the total number of outstanding loans now tops 849,000 with an astonishing value of �£94.8 billion at the end of last year.

For those with established property portfolios, and the necessary experience in managing such a property bank, then these have certainly been the good times. However, this should be a timely warning for innocent late comers - valuations are high, yields have fallen and risks are rising – watch out for some local and painful property bangs.

And speaking of bangs, my useless date of the week is that in May 1957, when we saw the explosion of the UK’s first Hydrogen bomb above Christmas Island in the Pacific.

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“Collateral damage” is normally the phrase. The fall out from the housing market in the US has taken its next casualty in the form of a UBS hedge fund which could cost the company about �£150million. The fund apparently had burnt its fingers in the sub-prime debacle and Dillon Read Capital Management is to be folded back into UBS’s investment management arm after just two years of life. A warning for both property and hedge investors...

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And finally……more excellent value from a local authority with news that the Leamington Spa Council has spent �£10,000 on a luxury pigeon coop - currently however, there are no pigeons actually resident. A true market with excess supply and no demand – a dropping in the pigeon market?

Have a good week,

Justin A. Urquhart Stewart

Director

Seven Investment Management