Overseas Buyers and the Value of the Pound

There is no disputing that the current value of the pound presents a fantastic opportunity for overseas buyers. Derby has long been a coveted destination for UK buyers and now foreign buyers who view owning property here as a solid investment that delivers exceptional returns.

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Despite the economic uncertainty surrounding Brexit, confidence in the Derby property Market from abroad remains high. The UK is largely regarded as stable and resilient, especially compared to other European markets. We are finding that cash-rich buyers from those countries are opting to purchase property in Derby oppose to the likes of cities like London.
International interest is typically centred around particular locations within the city centre projects, we’ve noted a marked increase in enquiries from foreign buyers. In fact, the last three investment enquiries we have had were from foreign investors, although we’ve also seen an increase from those buying in American dollars – from the Far East and America, often at the higher end of the market.

Certain places, however, continue to remain popular among domestic buyers, like DE22 and DE23 and the surrounding area. As a return on investment they provide the most interesting returns, and as a Property Management Agency in Derby we are never short of demand from tenants

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Article 4 coming to Derby

Over the past few years, what are known as Article 4 Directions have sprung up all over the country. Put simply, what they state is that anyone wishing to convert a house currently in use as family accommodation into a house in multiple occupation (HMO) must be granted planning permission.

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Article 4 Directions have been introduced in a range of English cities including Sheffield and Leeds. In the East Midlands, Loughborough was the first to take advantage of the new legislation in February 2011 and Nottingham followed suit a year later in March 2012. Derby has yet to launch a consultation on Article 4 but according to the Environmental Health Officers in Derby it is on its way whereas Leicester will be making an Article 4 Direction in August of this year, although this will be what is known as a non-immediate direction; landlords will have a one year grace period in which to reinstate their properties as HMOs if they so wish. Needless to say, Article 4 is hugely unpopular with landlords, but how did it come about?

The route of the problem can be traced back to 1995 and the introduction of the General Permitted Development Order (GPDO) which granted automatic planning permission for certain types of development, known as permitted development. Article 4 of the GPDO gives Local Planning Authorities the right to restrict some types of permitted development. It was originally intended to enable councils to preserve the character of conservation areas and that is actually what it is still used for today in places such as Brighton and Bath. However, that all changed in April 2010 when HMOs were given their very own usage class under the planning laws, Class C4. Previously HMOs had been categorised as Class C3, small dwelling houses used as a main residence by families or groups of up to 6 people living together as a single household. A class C4 property is defined as a small dwelling house occupied by between 3 and 6 unrelated individuals who share common amenities such as a kitchen or bathroom. Most importantly, under the GPDO, change of use between Class C3 and C4 or vice versa counts as a permitted development.

The problem is that councils can use Article 4 to restrict change of use between the two classes as a permitted development. It would be easy to assume that Article 4 is just another form of regulation that landlords have to deal with, something that takes up both time and money, but the reality is that planning permission for change of use from C3 to C4 is unlikely to be granted. To further complicate things, for the purposes of mandatory licensing, a HMO is defined as a building with three or more storeys and five or more unrelated tenants. Article 4 is actually far more restrictive than mandatory licensing because it applies to houses with 3 or more unrelated tenants and any number of storeys. HMO licences also tend to be granted provided the applicant meets the licensing conditions, unlike planning permission under Article 4.

So, what is the justification for using Article 4 to restrict the proportion of HMOs within a given area? Well it certainly isn’t in the interests of raising revenue; there is no fee payable for making a planning application to convert a house from C3 to C4 usage and the council has to bear the whole cost of processing the applications and dealing with any appeals. One thing immediately becomes clear when you look at the use of Article 4 Directions to restrict HMO development; they are almost exclusively used in areas with high student populations. Dig a little deeper and another thing becomes apparent; Article 4 tends to be used in poor cities with vibrant, successful universities. This is true of Sheffield, Leeds, Leicester, Nottingham, Loughborough… the list goes on. Look at Oxford and Cambridge, both renowned university towns but both also affluent cities in their own right. In Cambridge there are no Article 4 Directions in place and no intention of introducing any. In Oxford there is a very limited Direction in place but it does not prevent C3 houses changing use to C4; rather, it prevents a handful of office and industrial sites – places that generate employment, wealth and tax revenue for the city – being converted into student accommodation that generates higher yields for the landlords.

When Sheffield City Council introduced Article 4 they cited a desire to create “cohesive communities where people from different backgrounds and of different generations get on well together, feel valued and feel they have a voice.” They stated that allowing the development of areas with a high concentration of shared housing, which can lead to a transitory population, should be discouraged. There was much talk of creating “balanced communities.” The consultation exercise performed by Nottingham City Council in advance of the launch of Article 4 also made much of balanced, diverse communities and hinted darkly at the problems that might be caused by high concentrations of HMOs though, given that in some areas of the city over 50% of the housing stock is made up of HMOs, any such problems should already be glaringly apparent. It spoke of reclaiming the city centre for families and creating vibrant communities. It seems that the justifications for Article 4 are extremely light on facts and statistics and more to do with creating a utopian vision of a community where old and young, rich and poor live in vibrant harmony.

What about the problems created by Article 4, for they are many and various. Firstly, an Article 4 Direction massively skews the housing market in an area it is applied to. Houses with HMO status increase in value, those without fall in value; evidence has shown that this fall is typically between 20 and 40%. The winners are landlords who own existing HMOs, the losers are owner occupiers who cannot sell their houses. In other words, the residents that the council are trying to support and lure back into these communities are the very ones that are being penalised by the legislation.

Article 4 also takes no account whatsoever of changing demographics. In Sheffield as a whole, 1 in 9 of the residents are students. In the City of Nottingham students make up an even higher proportion of the population, 17% or 1 in 6. Back in 1984 there were around 12,000 students in Sheffield; last year there were 61,000. These increases are driven by a number of factors including the “education, education, education” policies brought in by Tony Blair. Whatever the causes, all these students have to live somewhere and in areas close to the universities students make up a significant majority of the residents. Of course, they could live in the purpose built student accommodation developments that are springing up in many university cities, but most students prefer to live in HMOs, not least because rents in purpose built accommodation are around 50% higher.

This policy is unbelievably discriminatory against students. They are forced to live in accommodation that is expensive, institutional and disruptive for those with heavy workloads or who, like nurses, work shifts. They are denied any chance to become part of the community in which they will typically live for at least two years. It is not just students that live in HMOs but also young professionals and people who have moved through work. Students can’t afford to compete with these people for increasingly scarce HMO places. If a local government tried to discriminate against any other social group in this way, they would find themselves in court.

The very concept of a balanced community is a nebulous one. I live in a town where 95% of the residents are owner occupiers, where unemployment is virtually unheard of and well under 1% of the population belong to an ethnic minority. It is hardly what you might call balanced but, strangely, the local council are reluctant to introduce any policies to address this highly unsatisfactory situation. It is hard to imagine a more vibrant, diverse and balanced community, yet this was an area with a large student population and a high concentration of HMOs. All the evidence suggests that HMOs and students go a long way to creating balanced communities, not destroying them.

The laws of supply and demand dictate that restricting the number of HMOs in an area will drive up rents. Conversely, all local authorities are required by law to ensure a given number of places are available in small HMOs and it is well known that the stock of social housing that caters to one person households is wholly inadequate. By imposing an Article 4 Direction, councils are actually preventing themselves from meeting their own obligations.

It is clear that the justifications given for imposing Article 4 to limit the number of HMOs do not hold water, so what are the real reasons? There have been some suggestions that Article 4 has been used to create demand for purpose built student accommodation developments, many of which are undersubscribed. The argument is that since some PBSA blocks are owned and operated by local authorities, this is a method of revenue raising by the back door. However, most PBSA developments are being built by the universities and private investors; most city councils only have a modest presence in the market, not enough to justify legislating to distort the market. Well, I love a conspiracy theory as much as the next man so let me combine a few facts and a healthy dose of conjecture to explain what I think Article 4 is really all about.

Usage Class C4 was created by a struggling Labour government just three weeks before the last election. Given that they were still dealing with the aftermath of the worst financial crisis since the 1930s and facing a drubbing in the polls, you would have thought that pushing through a minor amendment to the planning laws would be at the bottom of their list of priorities. The timing was suspicious to say the least. Although it was a minor change, it had a big impact because it allowed Article 4 of the GPDO to be used to restrict development of HMOs. A cynic might argue that Class C4 was created expressly for this purpose. Certainly, within months of the change, the first consultations for Article 4 Directions were already being made.

Article 4 is almost exclusively used in areas with high student populations. In the consultation for the introduction of Article 4 in Nottingham, the language used about students was very negative; they were described as a continuing drain on community resources. Students are by definition a transient population; they normally live in university accommodation for their first year and then in the community for the next two years. Many of them are registered to vote at home rather than at their university address. Councils that penalise students are unlikely to pay the price at the next election.

It has been said that Article 4 is an attempt at social engineering. Could it be that in reality it is actually electoral engineering?

What does the Tenant Fee Banning actually mean to Landlords & Tenants?

With our new Chancellor of the Exchequer revealing a ban on tenant fees in his first Autumn Statement what does this actually mean for Derby tenants and Derby landlords?

 

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The private rental sector in Derby forms an important part of the Derby housing market and the engagement from the chancellor in the Autumn Statement is a welcome sign that it is recognised as such. I have long supported the regulation of lettings agents which will ensconce and cement best practice across the rental industry and, I believe that measures to improve the situation of tenants should be introduced in a way that supports the growing professionalism of the sector. Over the last few years, there has been an increasing number of regulations and legislation governing private renting and it is important that the role of qualified, well trained and regulated lettings agents is understood.

Great News for Derby Tenants

So, let’s look at tenants.. this is great news for them, isn’t it?  Well before you all crack open the Prosecco, read this …

Although I can see prohibiting letting agent fees being welcomed by Derby tenants, at least in the short term, they won’t realise that it will rebound back on them.

First up, it may well take between 12 and 18 months to ban fees, as consultation needs to take place, then it will take an Act of Parliament to implement the change. A prohibition on agent fees may preclude tenants from receiving an invoice at the start of the tenancy, but the unescapable outcome will be an increase in the proportion of costs which will be met by landlords, which in turn will be passed on to tenants through higher rents.

Published at the same time as the Autumn Statement, hidden in the Office for Budget Responsibility’s Economic and Fiscal Outlook on the Autumn Statement (The Office for Budget Responsibility being created by Government in 2010 to provide independent and authoritative analysis of the UK’s public finances), it said …

“The Government has also announced its intention to ban additional fees charged by private letting agents. Specific details about timing and implementation remain outstanding, so we have not adjusted our forecast. Nevertheless, it is possible that a ban on fees would be passed through to higher private rents”

 

The charity Shelter and Scotland

Scotland banned Letting Fees in 2012. The charity Shelter have been a big voice in persuading and lobbying the Government since it managed to persuade the Scottish Parliament to ban fees in 2012. On all the TV and radio shows at the moment, they keep talking about their Independent Research, which they said showed that,

“renters, landlords and the industry as a whole had benefited from banning fees to renters in Scotland. It found that any negative side-effects of clarifying the ban on fees to renters in Scotland have been minimal for letting agencies, landlords and renters, and the sector remains healthy.”

 Going on,

“Many industry insiders had predicted that abolishing fees would impact on rents for tenants, but our research show that this hasn’t been the case. The evidence showed that landlords in Scotland were no more likely to have increased rents since 2012 than landlords elsewhere in the UK. It found that where rents had risen more in Scotland than in other comparable parts of the UK in 2013, it was explained by economic factors and not related to the clarification of the law on letting fees”

 .. yet the devil is in the detail….

Only yesterday Shelter were quoting this Research from December 2013 to say rents never went up following the tenant fee ban in Q4 2012. We have read that research and I agree with that research, but it was published three years ago, only 12 months after the ban was put into place.

I find it strange they don’t seem to mention what has happened to rents in Scotland in 2014, 2015 and 2016 because that tells us a completely different story!

 

What really happened in Scotland to rents?

We have carried out my research up to the end of Q3 2016 and this is the evidence I have found..

In Scotland, rents have risen, according the CityLets Index

by 15.3% between Q4 2012 and today

(CityLets being the equivalent of Rightmove North of the Border – so they know their stuff and have plenty of comparable evidence to back up their numbers).

When we compared the same time frame, using Office of National Statistics figures for the English Regions between 2012 and 2016, this is what has happened to rents

  • North East 2.17% increase
  • North West 2.43% increase
  • Yorkshire and The Humber 3.21% increase
  • East Midlands 5.92% increase
  • West Midlands 5.52% increase
  • East of England 7.07% increase
  • South West 5.82% increase
  • South East 8.26% increase
  • London 10.55% increase

….and let me remind you about Scotland … 15.3% increase.

Are you really telling me the Scottish economy has outstripped London’s over the last 4 years? Is anyone suggesting Scottish wages and the Scottish Economy have boomed to such an extent in the last 4 years they are now the Powerhouse of the UK? .. because if they had, Nicola Sturgeon would have driven down the A1 within a blink of an eye, to demand immediate Independence.

So what will happen in the Derby Rental Market in the Short term?

Well nothing will happen in the next 12 to 18 months .. it’s business as usual!

… and the long term?

Rents will increase as the fees tenants have previously paid will be passed onto Landlords in the coming few years. Not immediately .. but they will.

As a responsible letting agent, I have a business to run. It takes, according to ARLA, (Association of Residential Letting Agents) on average 17 hours work by a letting agent to get a tenant into a property. We need to complete a whole host of checks prescribed by the Government; including a right to rent check, Anti Money Laundering checks, Legionella Risk Assessments, Gas Safety checks, Affordability Checks, Credit Checks, Smoke Alarm checks, Construction (Design & Management) Regulations 2007 checks, compliance with the Landlord and Tenant Act, registering the deposit so the tenants deposit is safe and carry out references to ensure the tenant has been a good tenant in previous rented properties.

All of which the vast majority of lettings agents take very seriously and are expected to know inside out making us the experts in our field. Yes, there are some awful agents who ruin the reputation for others, but isn’t that the case in most professions?

.. but business is business.

No landlord, no tenant and certainly no letting agent does work for free.

I, along with every other Derby letting agent will have to consider passing some of that cost onto my landlords in the future. Now of course, landlords would also be able to offset higher letting charges against tax, but I (as I am sure they) wouldn’t want them out of pocket, even after the extra tax relief.

So what does this all mean for the future?

The current application fee for up to two applicants at my agency is £225 and £75 for every applicant thereafter but on average the fee is £225 per property.

I am part of a Group of 500+ Letting Agents, and recently we had to poll to find the average length of tenancy in our respective agencies. The Government says its 4 years, whilst the actual figure was nearer one year and eleven months, so let’s round that up to two years.

That means £225 needs to found in additional fees to the landlord, on average, every two years.

 

In Actual Pound Notes

In 2005, the average rent of a Derby Property was £561 per month and today it is £640 per month, a rise of only 14.1% (against an inflation rate (RPI) of 38.5%).

Using the UK average management rates of 10%, this means the landlord will be paying £768 per annum in management fees.

If the landlord is expected to cover the cost of that additional £225 every two years, rents will only need to rise by an additional 2.9% a year after 2018, on top of what they have annually grown by in the last 5 years.

So, if that were to happen in Derby, average rents would rise to £769 per month by 2022 so the landlord would pay £1147 per annum in management fees which would go towards covering the additional costs without having to raise the level of fees.

 

.. but that is bad news for Derby Tenants?

Quite the opposite. If the average rent Derby tenants pay had risen in line with inflation since 2005, that £561 per month would have risen today to an average of £776 per month. (Remember, the average today is only £640 per month).. and even if inflation remains at 2% per year for the next six years, the average rent would be £769 per month by 2022.. meaning even if landlords increase their rents to cover the costs tenants are still much better off, when we compare to the £769 per month figure to the £856 per month figure.

 

Conclusion

The banning of letting fees is good news for landlords, tenants and agents.

It removes the need for tenants to find lump sums of money when they move. That will mean tenants will have greater freedom to move home and still be better off in real terms compared to if rents had increased in line with inflation.

Landlords will be happy as their yield and return will increase with greater rents whilst not paying significantly more in fees to their lettings agency. Letting agents who used to charge fair application fees won’t be penalised as the rent rises will compensate them for any losses.

.. and the agents that charged the silly high application fees.. well that’s their problem. At least I know I can offer the same, if not a better service to both my landlords and tenants in the future in light of this announcement from Phillip Hammond.

Should I Repair or Replace my Boiler?

Yes it’s that time of year again when everyone starts to put on their heating systems and complains about it getting too cold. As the heating systems have not been in use throughout the summer, now that they are being tested faults with the system are occurring some problems which could have been resolved earlier if tested rather than now when it’s unbearable to go a day without heating.

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I spoke to a landlord just this week who owns a property in the derby city centre, she was upset at the fact that she had to find cash for a new boiler as the engineer who she normally uses advised her that it would be more cost effective for her to replace the boiler which is approximately y 14 years old.

She emailed me after following the derby city blog in recent weeks, and asked for my advice as to when it’s the right time to reinvest into a new boiler and is it worth repairing the old one. With all my experience in Property Management in Derby I can honestly say it varies boiler to boiler but usually after 13 years its best to replace a boiler that has a significant fault.

The reason for this is old boilers will develop problems almost every year, on average if it’s costing you £150-£200 to repair every year or needs a one off £350+ repair once a major component goes or when 2 components go, is it really worth it?

On average it costs approx £1100-£1200 to change a boiler. A boiler at this price should be good for 10 years without developing any problems, so on average if a landlord puts away £100 a year towards the cost of a new boiler after 11 years you will have the money to change it without feeling the pinch.

Now in the long run comparing £100 a year towards saving for a new boiler vs. £150 every year on average repairs is a no brainer. Not only is it cost effective but it leaves you with the peace of mind that for 10 years you don’t have to worry about this problem. The £100 a year saving is better option even when comparing to taking out a insurance policy which will cost you around the same on yearly policies but once you need a call out the excess charges will hurt your pocket more so. Insurance companies are there to make a profit so it is common sense to know in the long run it costs you more.

After seeing the calculations we both agreed that if she spent £400 to repair her boiler and there was no guarantee that another part would go, it’s not worth the risk. As you could imagine spending £400 one year if the following year it developed another £200 fault you could have been half way through a new boiler. Some repairs are worth the risk others not so, it’s best to take the advice of your gas engineer, if in doubt get another quote as it is probably one of the biggest one off costs in a buy to let property it is good to be sure.

If you have any property related issues please feel free to message me and hopefully we could go through your costings.

Highest % return properties in Derby

I’ve been asked the question on which properties make the best investments in derby a hundred of times, so after being asked again today I thought it was time to put this into my blog so my readers can know a trade secret which has been very successful for me in the Derby Property Market.

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When considering investing in a property there are two things you should consider:

  1. Return on investment
  2. Capital growth

Now with 2/3 bedroom terraced houses being the most popular form of property investments in derby and successfully bringing in a healthy yield of around 6% per annum. It is a base to which portfolio landlords build on, as smaller investment amounts help spread their risk on investors’ money and give them more flexibility.

The attraction to this form of terraced houses provides a good cover for a hidden gem of an investment. This is a conversion of a terraced house into 2 flats. Let me give you an example in regards to the derby property market, here the average 2 bedroom terraced house in de23 or de22 sells at £65000 giving you a rental return of £400pcm. At least 40 of these properties have changed hands over this past year, yet a 2 flat conversion has remained on the market for a full year at £75000, it is currently let at £250pcm for each self contained flat, this is well below market value, these flats combined should give a return at minimum £600pcm which is just under 10%.

These properties are a safe haven for investors, even if one flat is vacant it is enough to cover the mortgage repayments for both through the one that is tenanted, however borrowing on these types of properties can be difficult which maybe one of the reasons they are overlooked.

If you have come across one of these properties and want to discuss please email me, or even if you have seen another property you are interested in.

Leasehold vs Freehold – Buy to let landlords prospective

After meeting with a prospective landlord last night we started to discuss his feelings to purchase either a leasehold or freehold property. So leasehold-vs-freeholdi thought I’ll write today’s blog on what we discussed:

In general terms, there are three forms of legal ownership of property in the UK:

  • Freehold, where you own the land and have control over the building
  • Share of freehold, where you own a share of the freehold and can influence decisions of what happens to the building
  • Leasehold, where you own a lease that gives you permission to occupy the property for a certain period; a freeholder retains ownership of the land.

The majority of flats and maisonettes in the UK are sold on a leasehold basis. For houses, freehold has been the traditional type of tenure (although this is beginning to change, with registrations of new build leasehold detached houses more than doubling in 2015).

So when you’re looking for properties that would make a good buy-to-let investment, does it matter what kind of ownership you look at?

From the perspective of a landlord looking for a low-risk investment property to own and tenant for the long term, leasehold properties have different issues to freehold properties, which all landlords need to be aware of.

I have always been a fan of freehold over leasehold for a number of reasons.

  1. Leasehold means service charges and ground rents…

…which can significantly bite into your cash flow. How much? It depends on the contract with the freeholder. It might add up to less than £100 a year but you need to check it because sometimes it can be many hundreds or even thousands of pounds.

  1. Leasehold means that you will never own the property, only the lease.

Is this just a legal distinction? No – it effectively means you, the landlord, also have a landlord – with all the issues in the points to follow. Also, bear in mind the freehold can be sold to the highest bidder.

  1. Leasehold means being restricted in what you can do with the property

You cannot develop the property on your own initiative, therefore it is harder for you to add value and grow your investment that way.

  1. Leasehold means being beholden to a freeholder and their demands.

Your landlord can recover unpaid ground rent going back 6 years – they can even ask you for the full amount in one go. You will probably have to pay maintenance charges – which you might find excessive, given the quantity and quality of the work they carry out. Or when major building works are required, perhaps the price you’re paying includes an over-generous “management fee” for the freeholder.

Some freeholders are reasonable in their demands, but by no means all of them.

  1. Declining lease lengths can cause the property to decline in value.

The market value of your leasehold property depends on the length of the remaining lease.

It drops in value sharply when the lease length goes below 80 years (more detail in the next two points). Really, to preserve the value of your investment, you would want to avoid the lease going below the 90-year mark during your ownership.

  1. It can be expensive to extend a lease.

The cost levied by the freeholder to extend the lease depends on how many years are left to run, and could leave you looking at a significant outlay (take for example: the £13,000 fees being asked of homeowners in Cramlington, Northumberland). Also in most cases you would need to own the property for two years before you earn the right to extend the lease.

  1. Mortgage lenders generally prefer freehold to leasehold

If you are funding your investment with a buy-to-let mortgage you may find it difficult to get finance for a property with a shorter lease.

The exact threshold varies from lender to lender but in general, finance companies are reluctant to lend on a property with a lease shorter than 70 or 80 years

  1. Disputes can often arise between leaseholders and the freeholder.

Buying a leasehold property means entering a relationship. Just like any other relationship, it can be good or bad. Some freeholders are reasonable. Some reach aggressively for lawyers. And some seemingly cannot be contacted at all – see the next point…

  1. If the freeholder disappears, it can be a nightmare scenario to resolve.

“Absent freeholder” can be a real problem – just see the number of threads about this.

It means you’re legally bound to a relationship with an entity you don’t know and aren’t able to contact. Although in some ways this can mean a nice quiet life for a while, it can pose significant problems when it comes to buying and selling, particularly where mortgage lenders are concerned.

  1. Leasehold can mean depending on other leaseholders, too

Just as leasehold puts you in a relationship with a freeholder, buying a leasehold flat means you are potentially affected by the actions of other owners on the same building or plot. You have a commercial dependence with other leaseholders to pay their service charges. If they don’t, the whole plot or building could suffer.

  1. You depend on the freeholder for building maintenance

If the freeholder does not maintain the building to a high standard, the value of your property can be affected. As a leaseholder, you depend on the freeholder acting in your mutual best interests. As you can deduce from some of the points above, this is by no means guaranteed.

One more reason to consider freehold over leasehold…

With the sharp increase in leasehold new build houses that we’re seeing at the moment, freehold homes are becoming (relatively) scarcer. I believe that where there is scarcity, there is value – therefore freehold houses will command a premium in the future.

To my mind, landlords should now be looking to secure freehold houses. I believe that they will have better capital appreciation because they will be more desirable in the future.

So which type of ownership should you favour for buy-to-let?

As a landlord, it is vital to understand the differences between leasehold and freehold from a cash flow perspective, a future value perspective, and a “desirability” perspective.

If you want to discuss any leasehold or freehold opportunities and would like a second opinion, i would be happy to discuss !!!

298% Rise in Derby Properties since 2000

Derby house prices since the Millennium have risen by 298%, whilst average salaries in Derby have only grown by 51% over the same time frame. This has served to push home ownership further out of reach for many Derby people as they have to battle against raising considerable deposits and meet sterner lending criteria, as a result of new mortgage regulations introduced in 2014/5.  The private rental market in Derby has grown throughout the last twenty years with buy-to-let investors purchasing a high proportion of newly built residential properties that were built and designed for the owner occupier sales markets.  For example, in the city of Derby, roll the clock back 20 years and there were 94,807 properties in the City, whilst the most recent set of figures show there are 105,100 properties – a growth of 10,293 properties.

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However, anecdotal evidence suggests that quite a number of those 10,293 were bought by Derby buy-to-let landlords, as over the same 20-year time frame, the number of rental properties has grown from 32,524 to 40,043 in the city – a rise of 7519 properties.

Nevertheless, some say this historic growth of the Derby rental market might start to change with the new tax rules for landlords. Yet the numbers tell another story. Across the board, mortgage borrowing climbed to a 9 year zenith in March this year as the British property markets traditional Easter rush corresponded with landlords hurrying to beat George Osborne’s new stamp duty changes – buy-to-let landlords borrowed £7.1bn in March 2016 (the latest set of figures released) which was 163% up on the £2.7bn borrowed in the previous March.

 You see, from my point of view, I don’t think things will get worse in the buy-to-let market in Derby and these are the reasons why I believe that:

Firstly, what else are Derby landlords going to invest in if it isn’t property – the stock market? Since the Millennium, the stock market has risen by an unimpressive total of 5.54%, quite different to the 298% rise in Derby property prices?

Secondly, its true the 3% stamp duty is the first blow on top of a number of other tax changes to be phased in between 2017 and 2021, such as landlords facing a constraint in their ability to offset mortgage interest and, if sizeable numbers of landlords do take the decision to sell their portfolios, this will lead to a substantial amount of second hand properties being put up for sale. Yet that might not be a bad thing, as I have mentioned in previous articles there is a serious shortage of properties to buy at the moment in Derby: the stock of property for sale being at a six year all time low.

.. Thirdly, if there are fewer rental properties in Derby, as supply drops and demand remains the same (although ask any letting agent in Derby and they will say demand is constantly rising) this will create a squeeze in the Derby rental market and as a result rents will rise. In fact, I predict even if landlords don’t sell up, Derby rents will rise as Derby landlords seek to compensate for increased costs, which means more landlords will be attracted back.

Derby Buy to Let sees returns of 12.64%

The other day I got chatting with one of my out of town landlords who was back in Derby visiting his family. To enhance his retirement, he has a small portfolio of four properties in the derby city centre and wanted my advice on where to buy the next property in Derby (as he lives in a college owned flat and anyway, would never dream of buying where he lives in Kensington (where the average value of a flat is £1.62m and a City house £4.1m.  Eye-watering to say the least!!).

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Before I could advise him, I reminded him that the most important thing when considering investing in property is finding a Derby property with decent rental yields for income returns, yet at the same time, it must have the potential for capital growth from rising house prices over time.  Going forward, Derby landlords will be under more pressure to find the best permutation of yields and capital growth, as extra stamp duty charges for buying properties and a squeeze on mortgage interest relief will raise their costs.

However, (you knew there would be a however) before we look at yield and capital growth, one important consideration that often many landlords tend to overlook, is the propensity of how likely the rent will increase.  Interestingly, the average rent of a Derby property currently stands at £659 per month, which is a rise of 2.9% compared to twelve months ago (although it must be noted this rise in rents is for new tenancies and not existing tenants). Anyway, back to yield and capital growth, the average value of a Derby property currently stands at £179,000, meaning the average yield stands at 4.41% per annum, which on the face of it, many landlords would find disappointing.  That is the problem with averages, so if I were to look at say 2 bed houses in Derby which are the sort of properties a lot of landlords buy, in Derby, the average value of a 2 bed house is £80,000, whilst the average rent for a 2 bed house is £475 per month, giving a yield of 7.12%.

Ultimately investors want to be making gains from both rent and house price growth.   When combined, the rental yield and capital growth gives you the return on investment, and that is what I told our friend.   Return on investment is everything.   So, looking at property values in Derby have risen in the last year by 5.52% …. which means the current annual return on investment in Derby for a typical 2 bed house is 12.64% a year …. not bad.

If you would like advice on any potential buy to lets in Derby , please get in touch.

 

Derby Property Market after Brexit

Now that we have come to terms with Brexit and turn our attention to other subjects like Christmas shopping and debate about who will win premiership this season  the media are returning to their mixed messages of good news, bad news and indifferent news about the Brit’s favourite subject after the weather … the property market.

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The thing is the UK does not have one housing market. Instead, it is a patchwork of mini property markets all performing in a different way. At one end of scale is Kensington and Chelsea, which has seen average prices drop in the last twelve months by 6.2%. But what about Derby?

Property prices in Derby are 5.52% higher than a year ago

and 3.2% higher than 3 months ago.

So what does this mean for Derby landlords and homeowners? Not that much unless you are buying or selling in reality. Most sellers are buyers anyway, so if the one you are buying has gone up, yours has gone up.  Everything is relative and what I would say is, if you look hard enough, there are even in this market, there are still some bargains to be had in Derby.

However, the most important question you should be asking though is not only is what happening to property prices, but exactly which property is worth buying? I like to keep an eye on the property market in Derby on a daily basis because it enables me to give the best advice and opinion on what (or not) to buy in Derby. With interest rates cut to 0.25%, cheaper mortgages on the cards and the undersupply of housing in the Derby area we can expect a steady growth

The next six months’ activity will be crucial in understanding which way the market will go this year after Brexit … but, Brexit or no Brexit, people will always need a roof over their head and that is why the property market has ridden the storms of oil crisis’ in the 1970’s, the 1980’s depression, Black Monday in the 1990’s, and latterly the credit crunch together with the various house price crashes of 1973, 1987 and 2008.

And why? Because of Britain’s chronic lack of housing will prop up house prices and prevent a post spike crash. … there is always a silver lining when it comes to the property market as demand always outweighs supply so property will always out perform any other type of investment.

DERBY VS NOTTINGHAM PROPERTY MARKET

When purchasing a buy to let property, there are two ways landlords make money through property letting
– capital growth and rental income growth.

A landlord from London, who has a number of properties in both Derby and Nottingham, asked me a few weeks ago about the difference between Derby and Leicester housing markets. He was focused on capital growth but als
o wanted to ensure his yield was relatively fair. I was quite surprised with my findings and wanted to share them
with you.

The average property price in Derby is currently £189,000. In the laderby-eevening-telegraphst 3 months property values in Derby, according to my calculations, have dropped by just over 0.8%. Whilst in Nottingham, average property prices in Nottingham are £184,000, having dropped by 0.4% in the last 3 months. Therefore, is Nottingham the better bet?

Well, not necessarily.

Over the last 5 years, property values in Nottingham have risen by 20.5% and in Derby by 25.1%, meaning over the last 5 years, property values have increased at a 23% quicker rate in Derby compared Nottingham’s. But then there is question of yield, as Derby also normally has slightly higher yields than Nottingham, but Derby’s rental market can be quite fraught.

Each Derby (and Nottingham) landlord will have different needs and requirements in his or her property investment. If you want an unbiased opinion on what (and what doesn’t) make a good property investment. Knowing what has happened to values in different cities, enables us to spot any trends or opportunities for buy to let landlords.

If you would like to discuss my thoughts on the rental markets, feel free to  send me an email to info@arboretumlettings.co.uk