There are numerous leasehold Warner maisonettes in Walthamstow E17.  The main issues that Leaseholders face are -

(1)  Many of them have leases that are becoming relatively short and they therefore require advice with regards a lease extension.  It is best to extend before the lease drops below 80 years if possible (to avoid paying what is know as ‘marriage value’), but if the lease has dropped below 80 years it is essential to extend as soon as possible as the cost of extending can rise rapidly, especially as the lease drops below 70 years. 

In most circumstances extending your lease as soon as possible will save you money in the long run. 

Trying to sell a flat with a short lease can be difficult and often the price acheived is seriously compromised - it is worth extending your lease well before you plan to sell, not at the last minute when the freeholder is better placed to hold you to ransom.

(2)  They have issues with the freeholder (for example they do not feel that external repairs are undertaken promptly or at a reasonable price, or they feel that building insurance is too expensive).  For example Stella Creasy MP is currently campaigning against the introduction of terrorist cover by Freehold Managers PLC.  In this case Collective Enfranchisement (buying the freehold) might make more sense.

Please get in touch if you require advice on extending your lease or buying your freehold in Walthamstow.  We are always happy to discuss your options free of charge.  Our contact details are on our website -

http://www.cooperhayes.co.uk/contact.html

2005-2010 Deposits and Total Returns – Return on Equity

This section talks about total returns and Return on Equity, which could equally be called ROCE (Return on Capital Employed)

The first column is what would be needed for a 20% deposit in pounds; the second is the total return, ie capital growth plus cash flow, in pounds; the third column shows total return on equity and the final column total return on equity per annum compounded.

2000 - £22,475 deposit / £147,252 profit / 20.0% return on equity per annum compounded

2001 - £26,407 / £117,499 / 18.5%

2002 - £32,256 / £76,290 / 10.0%

2003 - £37,432 / £41,860 / 9.8%

2004 - £40,680 / £21,838 / 6.5%

2005 - £42,311 / £13,141 / 4.5%

2006 - £46,711 / -£12,535 / Loss

2007 - £49,742 / -£28,156 / Loss

2008 - £48,394 / -£18,218 / Loss

2009 - £41,004 / £23,806 / 26.0%

2010 - £45,854 / -£771 / Loss

Again as of 2010 early 2011 there was a sweet spot – significant profits could have been made by buying in 2009.  Apart from 2009 it seems to me that 2003 on earlier and one could have made very good returns, 2004 good returns, 2005 reasonable returns and since 2005 losses.  Of course it is the very long term, or at least over a full cycle, that is important – if prices fall further 2004-2005 purchases may move into a loss, if falls are over and prices start rising then subsequent years may well move into profit.  

2005-2010 Capital Growth to date and per annum since purchase

This section talks about Capital Growth to date.

The first column is Capital Growth to date in pounds; the second is Capital Growth to date in percentage terms.  The third column shows capital growth per annum, and includes the impact of compounding (ie it is not just a simple average capital growth per annum).

2000 - £116,896 total / 104% total / 7.4% per annum (compounded)

2001 - £97,234 / 74% / 6.3%

2002 - £67,990 / 42% / 4.5%

2003 - £42,111 / 23% / 2.9%

2004 - £25,870 / 13% / 2%

2005 - £17,714 / 8% / 1.6%

2006 - -£4,434 / -2% / -0.5%

2007 - -£19,442 / -8% / -2.7%

2008 - -£12,701 / -5% / -2.7%

2009 - £24,247 / 11% / 11%

2010 - £0 / 0% / 0%

As of 2010 early 2011 there was a sweet spot – significant profits could have been made by buying in 2009 (and selling in 2010!).  But apart from that period it is only purchases from 2002 or earlier who have beaten inflation by any significant amount.

2000-2010 Cash Flow

This section talks about Cash Flow assuming 20% deposit, 5% interest rates on an interest only mortgage on the other 80% and 30% other costs (10% management, 10% repairs, 10% voids).  No allowance has been made for tax.

The first column is cash flow in year one.  The second column is cash flow in total from year of purchase to end of 2010, the final column is average cash flow per annum over period of ownership.

2000 - £2,225 year one / £30,356 total / £2,760 per annum

2001 - £1,439 / £20,266 / £2,027

2002 - £269 / £8,299 / £922

2003 - -£766 / -£251 / -£31

2004 - -£1,416 / -£4,032 / -£576 

2005 - -£902 / -£4,573 / -£762

2006 - -£1,788 / -£8,101 / -£1,620

2007 - -£2,388 / -£8,714 / -£2,178

2008 - -£2,119 / -£5,516 / -£1,838

2009 - -£641 / -£442 / -£221

2010 - -£771 / -£771 / -£771

As prices rose cash flow of nearly £3,000 a year from 2000 rapidly dropped to £2,000 then £1,000 per annum for someone who bought in 2002.  Based on my estimate of costs, anyone who bought in 2003 or later has made an annual loss in terms of cash flow. 

The reality is that many people have probably kept costs down (perhaps self-managing, perhaps having less than one month of voids per annum, perhaps spending less of maintenance.) 

Equally, it is highly likely that many people probably spent £10,000 to £30,000 renovating their purchases prior to letting, or indeed have had to undertake fairly significant works at some point since.

Many people have had an unexpected windfall in terms of plummeting interest rates over the last few years.  It is hard to work out how best to view this.  It certainly will not carry on forever, but it is perhaps worth bearing in mind that people who bought in 2006 to 2010 average £185,000 of debt.  A 2% reduction on interest rates for these people (which perhaps happened as they came off a fixed rate deal) adds about £3,700 per annum to their cash-flow, an amount which puts them cash-flow positive.  I suppose it is important to realise the alternative situations of those who took out - say - a long term fix in 2006, and those who got lucky and came off a fix in late 2008 and saw the rates they pay fall.

2000-2010 Rental Returns

Average rents (estimated based on experience and discussions with experienced local estate agents) and Yield on current value.

2000 - £9,600 / 8.5% Yield on current value

2001 - £9,600 / 7.3%

2002 - £9,600 / 6.0%

2003 - £9,600 / 5.1%

2004 - £9,600 / 4.7%

2005 - £10,800 / 5.1%

2006 - £10,800 / 4.6%

2007 - £10,800 / 4.3%

2008 - £10,800 / 4.5%

2009 - £10,800 / 5.3%

2010 - £12,000 / 5.2%

Yields fell quickly in the first few years of the 2000s as prices rose whilst rents stayed stable.  Rents have risen since then, whilst yields have arguably stabilized at just over 5% bar a short period when they fell below 5% due to high house prices.

2000-2010 Average Prices and Annual Capital Growth

Average prices and percent capital growth on the previous year in Stratford Village were -

2000 - £112,373

2001 - £132,036 / 17% Year on Year Capital Growth

2002 - £161,279 / 22%

2003 - £187,159 / 16%

2004 - £203,400 / 9%

2005 - £211,555 / 4%

2006 - £233,704 / 10%

2007 - £248,711 / 6%

2008 - £241,971 / -3%

2009 - £205,022 / -15%

2010 - £229,269 / 12%

Prices rose quickly in the first few years of the 2000s before taking a pause for breath.  Prices rose strongly again in 2006 and a little less so in 2007, before falling nearly 20% over 2008 to 2009.  These falls partly reversed in 2010.

Over the last week or so I have been doing some research.  My suspicion was that many if not most people would be surprised by just how long ago it was that the real money was made in UK Residential Property.  The statistics that I have compiled and the analysis that I have undertaken appear to back this up, for central Stratford at least.  For a typical investment buyer, looking for income, buying 9 years ago or earlier would have been a wise more; if your concern was capital growth then buying after 2002 – 2003 was not necessarily that profitable.

My aim was to get an indication of how and when the money has been made in UK residential property over the last 10 years and how investors who bought in each of the last 10 years have faced.  I faced a trade-off between using nationwide data that might have given a good average for the country but was not actually representative of any particular buyer, and taking a detailed look at a much more specific area which would be more realistic but may show very different results what you would find in another area with different yields and capital growth occurring at different times.  I decided to look at a very specific area in detail in the hope that this will perhaps throw up results that are indicative of the country as a whole. 

Before I post my results and conclusions over the next few days and week I feel it appropriate to discuss my methodology.

Firstly, this is all about property as a rental investment but taking into capital growth as well.  I have not considered owner occupiers specifically.

I picked ‘Stratford Village’ as my area of study because I know the area well and all of the houses are very similar.  It is in London and may be reasonably representative of our Capital – it is a fairly nice bit of Stratford, and Stratford has the ‘Olympic Effect’ to counter the fact that it is quite rough and ready.  Equally it does not appear to behave like Prime Central London (PCL) or the nicer bits of London so perhaps is more indicative of other parts of the South East and the rest of the country than PCL would be.  How representative it is is open to much debate, but it gives an indication I am sure.  I would be fascinated to see this exercise replicated in other areas of the country for the sake of comparison.

In this study Stratford Village is defined as Aldworth Road, Faringford Road, Glenavon Road, Maiden Road, Shirley Road, Tennyson Road, Vernon Road and White Road, E15 between West Ham Lane and Vicarage Lane in Stratford.  The area consists almost exclusively of two up, two down Victorian Terraces which should sell for the same amount give or take 15% or so to reflect condition, and should all let for a fairly similar amount.

Typical House in Stratford Village

I have taken every sale from www.nethouseprices.com since January 2000 (ie up to mid / late 2010 – the most recent sales in 2010 are missing due to not being published yet; r ecent evidence on the ground, not yet published by the Land Registry, suggests prices are currently falling).  I have not tried to adjust for quality, or disregard bizarrely high or low prices – I have taken the sales at face value in the hope that transaction numbers are high enough to eliminate misleading results.

I have assumed all buyers have put down a 20% deposit and have had a 5% interest only mortgage on the balance for the entire period of ownership.  In reality deposits were lower in the early years and higher more recently.  In reality many borrowers may have borrowed at more than 5% especially early on, and many may be on lower rates now, but 5% is probably a reasonable adjusted average figure (though it is only an estimate).  I have ignored mortgage arrangement fees and valuation fees.

I have assumed that all properties were in reasonable, lettable, condition and did not require any refurbishment.  In reality I know that many of the properties have sold in very poor condition – it is far from impossible that a third of them required full modernisation, and that I am in effect under-estimating the cost of buying the property and getting it ready to let for the first time.  Equally some were perhaps in very good condition and may have attracted a slightly higher rent than the average I have put on the properties. 

I have assumed all properties have been let at market rent in each year of ownership.  I have assumed costs of 30% on the rent (10% for management, 10% for voids and 10% for maintenance and repairs – the latter two figures may be a little high, especially voids, and perhaps help offset any underestimate of initial costs).

I have not considered tax (either on income or capital growth).

I believe that I have been fair and that my conclusions will stand scrutiny.  But equally I know that some people will have bought badly and done worse than I have suggested, or bought well, managed themselves (and kept costs down) and done much better.  Please email me with constructive feedback and questions – I cannot promise to answer every point individually, but some may get personal responses and the best comments and questions will be the subject of follow-up posts.

Questions on any other property matters, especially collective enfranchisement (buying your freehold) and lease extensions, are also welcome.

Leasehold enfranchisement and residential lease extensions are a significant part of my work.  As a valuer it is my job to advise long leaseholders across Greater London and the South East what is a fair premium to pay to exercise their statutory rights, or if working for the freeholder advising them what they should receive when the long leaseholder exercises their rights.

A number of different factors go into the valuation and combine to give a final figure for the premium - and most of these factors are subject to debate.  Partly because of this two other figures are given in addition to the ‘fair premium’.  To take the long leaseholder’s point of view a ‘best-case’ premium amount is provided which is a reasonable figure to serve notice and reflects all the valuation factors going in the favour of the leaseholder, and a ‘worst-case’ premium amount which reflects all the valuation factors going in favour of the freeholder (and may give some indication of what level the freeholder might serve a counter-notice).  When advising freeholders the same figures are given but from the opposite point of view - what is best-case for a leaseholder is worst case for a freeholder and vice versa.

In most cases negotiation can resolve the matter of what the premium should be; the advice given is ultimately an attempt to anticipate what the Leasehold Valuation Tribunal will determine if the matter cannot be agreed by negotiation.

When a lease drops to below 80 years remaining there is an additional calculation - marriage value - that goes into the valuation and adds to the premium.  This is why it normally makes a great deal of sense to extend the lease or buy the freehold whilst the lease has 80 years or longer remaining.

‘Marriage value’ is one of the things that make these types of valuations so interesting to me.  Marriage value is based on the ‘relativity’ - the relative value of the flat with a short lease compared to with a share of the freehold.  So far so good, this is just what valuers do all the time - use comparable evidence to assess the value of an interest in property.  Where this becomes interesting is that the relativity is not based on the real world, rather it is based on a hypothetical ‘No Act World’ where long leaseholders do not have the right to extend their lease or buy their freehold, which has the effect of increasing marriage value and therefore the premium payable.  Without comparable evidence to rely on surveyors rely on negotiated settlements and graphs (amongst other things) to get to the relativity percentage.

I am beginning to research this matter in a formal way to try to get empirical evidence as to what types of evidence of relativity the Leasehold Valuation Tribunal tend to rely upon more than others, and if possible why.  I am also trying to get behind the various graphs available to work out which ones should be relied upon more than others.

I would be delighted to hear from anyone with an insight or point of view into these matters - please get in touch.

If any freeholders or long leaseholders in London and the South East require advice then the same applies - please drop me a line.

http://www.cooperhayes.co.uk/contact.html

One of the best things about the internet is the fact that there are numerous discussion forums.  Some are fun and relate to hobbies, but others can be valuable resources for information and advice.  They should not be regarded as a substitute for professional advice unless you are a very big risk-taker, but they can help an intelligent person ask their advisor the right questions and minimise the amount of time their advisor can charge for by ensuring that they are not discussing too many superfluous issues.

One such website is -

www.landlordzone.co.uk

It is a very good resource and well worth a look for all sorts of property-related subjects.

According to the Halifax 40% of areas are now affordable to first time buyers (FTBs) -

http://news.bbc.co.uk/1/hi/uk/8438179.stm

Selected quotations -

“Someone on average earnings could now afford the average first-time buyer property in 39% of local authority districts… the improved affordability has come about through a combination of lower interest rates and house price falls.”

“The tightening in lending criteria over the past two years is, however, making it very difficult for some to take advantage of lower property prices and mortgage rates.”

“In both London and Northern Ireland, the average first-time buyer property remains unaffordable for someone on average earnings in all local authority areas.”

“First-time buyers borrowed an average of about £104,000 in 2009, putting down a deposit of £29,439.”

So, to summarise, despite the fact that 61% of areas are unaffordable to first time buyers we are witnessing a significant improvement on past affordability.  The fact that more FTBs can afford to pay interest on a mortgage on a property they buy is a factor of the interest rate and the price they pay.

However banks still aren’t lending, and London and Northern Ireland are still completely out of reach.

FTBs borrow 3.5 times a £30,000 single income, having accumulated a year’s salary (plus purchase costs) as a deposit.

Where to start?

In my opinion house prices are still high.  This is not the same thing as saying that I am expecting further falls - I shall sit on the fence on this point at this time.  Some might say that the fact that first time buyers cannot afford to buy in 61% of areas evidences this, on the other hand it may just be that in the long term the BTL investor has replaced the FTB as the support at the bottom of the market – the pricing out of FTBs may not be a barrier to price stability or even rises in the future.  Others might say that if 39% of areas being affordable to FTBs is an improvement in affordability then what on earth were banks dong lending high LTVs in 2007 when the likelihood of falls was high?

The Bank of England base rate is clearly and significantly down, but this has not transferred proportionately to mortgage rates.  Demand is fundamentally allied to an ability to pay as well as desire to buy at a given price, and banks are clearly using arrangement fees, interest rates well above base, fearsome credit checking and large deposit requirements to minimise demand.  Any implication that base rates of 0.5% are very relevant, when banks want 4% plus in the short term and base rates will almost certainly rise significantly in the next few years, is misleading.

Finally, deposits and incomes.  The article says nothing about the reality of saving £30,000 in a world where inflation on unavoidable expenditure always feels high, and where the pressures to pay off student debt and also consume vigourously are massive.  Or is it realistic that the bank of mum and dad is the deposit provider of choice for most FTBs, and should we be concerned about the implications for social mobility?

As for incomes, where does £30,000 sit in the scheme of things?  Who earns £30,000?  I believe postmen earn around £18,000 pa – is it reasonable that a postman would require a 65% pay rise to become an FTB?  Clearly this last question has political implications as well as asking the more relevant question – what jobs are at the cut-off point whereby typical workers can just afford to become FTBs and therefore the market can be sustained in the long term?  It is clear that the property market cannot be sustained if bankers in the City cannot afford to buy; equally it is clear that the market does not require washer-uppers in hotel kitchens to support the market – what sort of jobs are at the cusp now, and what sort of jobs ‘should’ be at the cusp to achieve sustainability?