ANGLODAN PROPERTIES LTD - Your Partner for U.K. Property Investments

Since the Second World War, British residential property has increased in value every year save the period 1990-3. Since 1996 price increases have picked up again. Below graph illustrates price developments since 1969:

As can be seen from the graph below, this has meant that property prices have doubled four times in the course of the last three decades. Overall, prices have increased 26-fold.

Lower Borrowing Costs

Borrowing costs have fallen dramatically since 1990. The average homeowner in the UK is currently paying 13.6% of their gross income to support mortgage payments. Over the last 20 years households have been paying an average of 21% of their gross income in mortgage payments. This figure reached a peak of more than 36% in 1990 (Source: Halifax House Price Index for November 2003)..

For mortgage payments to equal the long term average, bank base rates would have to rise to 6.25% from the current 3.75%. For them to reach the peak of 36%, bank base rates would need to rise to 10%. (Source: Halifax House Price Index for November 2003). However, this is highly unlikely as the current consesus among analysts is that base rates will end 2004 at a level around 4.25-4.75%. There is thus substantial room for further price increases on homes before a level similar to that of 1990 is reached.

Fewer New Homes

In London and other major cities there are - in spite of a chronic undersupply of residential property – restrictions in place on the number of new homes than can be built on so-called ‘greenfields’. ‘Greenfields’ are sites that have not been built upon before. As it is more expensive for builders to construct on ‘brownfields’ – land that has previously been built upon – construction on these brownfields is considerably slower than similar construction on greenfields. This contributes to the current situation where the supply of new homes cannot keep up with demand.

The Centre for Economic and Business Research (CEBR) writes that the number of properties built in 2002 was only 150,000 which was the lowest level since the First World War. The figures for London and the South East show that new build is providing only about half the number of new properties needed. According to the CEBR, the reason for the shortfall is the inflexible planning laws which makes it very difficult to obtain building permits. (Source: Centre for Economic and Business Research, 23rd December 2002 and 19th May 2003). Thus, developers’ holdings of land with planning permission have fallen by 32% since 1999. Even with the currently extremely low rate of completed sales/homes, there is now only 2.5 years supply of land with planning permission held by developers. If housing output were to rise again and move towards the sort of levels demanded by both the market and the government, say to 1998 levels, there would be just over one year’s supply of land suitable for building (Source: FPDSavills on themovechannel.com, 8th September 2003). As it is, “the current, low levels of house building mean that the average house will have to last around a thousand years before it is replaced.” Thus, “the markets, and house prices, in the South are likely to be underpinned by our inability to build enough homes. Although large tracts of suburbia in southern towns and cities are generally poorly served by public transport, the sheer imbalance between supply and demand will add support to values” (Source: FPDSavills, Residential Newsletter for November 2003).

Halifax Bank plc – one of the largest lenders on the British property market – estimate that there will be a cumulative shortage of dwellings of around 500,000 just in London and the South East by 2021 if current levels of house-building are not increased (Source: Halifax national commentary, July 2003).

Pierre Williams, spokesman for the House Builders Federation, says that Britain’s housing under-supply currently continues to worsen rapidly by as much as 60,000 homes a year or 165 a day (Source: themovechannel.com, 9th June 2003).

The Royal Institute of Chartered Surveyors (RICS) report that the provision of social housing is now only one-fifth of what it was 20 years ago. Moreover, the U.K. is lagging far behind the rest of Europe in terms of the number of homes available to accommodate its population. The U.K. now has an average 10%, or 2.5 million, fewer homes than Germany, Italy and France, taking account of population size. (Source: RICS on themovechannel.com, 21st August 2003)

This very serious shortage of housing puts a severe upward pressure on U.K. property prices and is likely to continue doing so for the foreseeable future. As Peter Williams, Deputy Director General of the Council of Mortgage Lenders (CML), says, "Even a dramatic increase in supply would not completely prevent house price surges...". (Source: CML on themovechannel.com, 18th August 2003).

More Singles Want Their Own Home

More and more singles buy their own home. In 2001 40% of the homebuyers were thus singles compared to 25% in 1983 (Source: Economist Mark Ellis, Halifax Bank plc, on BBC News 21st August 2002). According to public statistics about 3.8 million new homes are needed in Britain over the next 20 years. 80% of these new homes will be intended for singles, including many singles wishing to rent (Source: Birmingham Midshires Building Society).

Healthy Rental Market

As property prices are increasing, many people in their twenties and thirties are delaying their first purchase of a home. Instead, they are renting, thus providing landlords with a buoyant rental market. At the same time, these first time buyers ensure that any downward trend in property prices will not remain for long as they will use such an opportunity to make their first property purchase. In this way, they provide a solid underpinning for the prices of smaller properties.

John Heron is the managing director of Paragon Mortgages, the UK’s leading specialist buy-to-let lender. He has the following comment about the U.K. rental market in the June 2003 buy-to-let index from Paragon Mortgages:

“The rental market is awash with people in their twenties and thirties who are delaying their first home purchase and going the rental route – a view that the RICS (Royal Institute of Chartered Surveyors, ed.) confirmed in their latest Residential Lettings Survey. Canny landlords are providing more supply to meet this demand.”

In Paragon’s Buy-to-Let Trends Survey from September 2003 it is reported that landlords expect gross yields to remain steady over the next 12 months at 8.1% and that net yields are forecast to improve from 5.8% to 6.0% in a year’s time. Landlords are confident of the future and expect to add on average 8.2% more property to their property portfolios over the next 12 months.

Paragon furthermore reports that landlords found tenants after an average of 3.43 viewings and that the average property remained unoccupied for only 2.8 weeks per year.

The positive outlook is reflected by a survey carried out amongst the participants in the Property Investor Show (Source: themovechannel.com, 4th August 2003):

Nick Clark, Director of the Property Investor Show comments:

"Our survey confirms landlords are enjoying buoyant times. With low interest rates and the surge in tenant demand from young individuals delaying their first home purchase, landlords have never had it so good."

Limited Sensitivity to Economic Cycles

According to the property market analysts Hometrack, British property prices developed as follows during the twelve months from August 2001 to July 2002:

As can be seen from this, the terrorist attack on 11th September 2001 only caused a temporary slowdown in the price rises. The considerable price rises that have occurred since February 2001 have – paradoxically – been caused in part by the lower interest rates that followed in the wake of the attacks on 11th September.

This shows the resilience of the property market: in case of an economic downturn (lasting a few years), low interest rates will underpin property demand whereas periods of economic growth will increase employment and thus strengthen demand for residential property. The property market is, in other words, supported not only during periods of economic growth but also during economic downturns.

Safer Than Shares

The abovementioned insensitivity to economic downturns is also illustrated by the fact that homes have historically been a much better investment than shares, particularly during the recent downturn of the stock markets. This can be seen in the following graph, where the development in British property prices since 2000 is compared with that of the British stock market index FTSE:

Although the stock market has outperformed the property market in certain shorter periods, the property market has thus been by far the best investment in the long run.

More Profitable than Fixed Interest Securities

Fixed interest securities, too, suffer from lacking behind the yield of properties in spite of the fact that the security offered by properties is not much different from that offered by bonds and other fixed interest securities. Below graph shows how the yield on properties – with the exception of the atypical period 1990-6 – has generally been above the yield available by placing funds in Certificates of Deposit. The property yield has thus been above that of fixed interest securities in nine out of the fifteen years preceding 1990 and in more than half of the observed period from 1975 to 2001. The property yield for 2002 exceeded the bond yield many times over and 2003 also looks more than likely to produce a property yield far exceeding that available on bonds and other fixed interest securities.

Reduced But Continued Price Rises

The above and other factors mean that the upward pressure on the property prices is expected to continue, although it is unlikely that the rate at which prices have risen over the last couple of years can be maintained. Conversely, it will also be unlikely that prices fall over time. There is thus extensive consensus among analysts that the question is by how much property prices will increase over time, not whether property prices will rise or fall.

Consequently, an increasing number of investors choose the property market over the stock and bond markets. In October 2000, just 8 per cent of the total number of properties sold were to investors, whereas in August 2003 the figure had risen to 13 per cent (Source: Survey from Royal Institute of Chartered Surveyors (RICS), September 2003).

The Secret of Property Investments

The above figures show that it is possible - even without mortgage financing – to obtain yields on property investments exceeding those available on shares and fixed interest securities. Historically, however, it has often been attractive to finance investments in both property and shares from external sources. The decisive difference between the two is that the interests on a mortgage used to finance a property investment will usually be covered by the rental income, whereas the interests on a loan used to finance share investments will not necessarily be covered by dividends or rising share prices.

A property purchase where the external financing amounts to 75% of the property value will thus give a yield on the 25% equity four times as high as the rise in the property value, provided that the rental income fully covers the financing and operating costs. An annual price rise of 10% will thus return a yield of 40% annually. This can be illustrated as follows:

Buyer invests	£ 25,000
Buy takes out mortgage for	£ 75,000
Property is purchased for	£ 100,000

Property value increases in one year by	£ 10,000 (10%)
Less mortgage interest and operating costs	£ -6,000
Plus rental income	£ 6,000
Annual profit	£ 10,000

Annual profit as % of initial investment (10,000 / 25,000)	40%

The above is obviously a very simplified example. See more detailed calculations here.

As can be seen from the sections further above an investment in U.K. residential property is rather safe. Even so, it quite clearly has a considerable profit potential, too.

Why British Properties?

Factors

Constant Price Rises

Lower Borrowing Costs

Fewer New Homes

More Singles Want Their Own Home

Healthy Rental Market

Limited Sensitivity to Economic Cycles

Safer Than Shares

More Profitable than Fixed Interest Securities

Reduced But Continued Price Rises

The Secret of Property Investments