The outcome of the UK first super casino licence bid process was announced on Tuesday 31 st January - to everyone's surprise Manchester won the bid. It's likely the friction between the bids from Blackpool and London Greenwich had something to do with this - they both threatened the selection committee with legal action. Manchester has a large population within its catchment area and is a good regeneration location. Clearly it's come as very bad news for Blackpool and Greenwich. The area where the casino will be built - to the west of Manchester city centre close to the new Manchester City stadium - will undoubtedly experience a boost in property and land prices.
There is likely to be an immediate surge in house prices, though the jury is out on how much long term positive impact the super casino will have. There are likely to be 2700 new jobs and £275 million invested in the casino - but compared with the 30,000 jobs a year being created in London's financial centres, it is relatively small. It might help Manchester stake it's claim to be the UK's second city ahead of Leeds, Birmingham, Glasgow. Overall the announcement seems to have gone down fairly well with the neutral people - it is hoped it will regenerate a deprived area of the north-west. But for all those people thinking about visiting casinos - it's gambling - and investors know not to gamble - they make calculated risk based investments - no problem investing in property close to the casino - just don't visit it that's all.
Oil / Gas Price and Inflation
Spot wholesale gas prices have dropped to 22p/therm (from levels of 50 - 80p a year ago) because of a flood of imports from Norway and the warm weather. Meanwhile, oil prices dropped to $49/bbl in early January before rising to $58/bbl early February - well below the highs of $78/bbl last July. We anticipate gas prices to stay low but oil prices to rise slowly into the $60-70/bbl range in 2007. So the inflationary pressure has certainly eased from oil/gas prices - however, most retailers and manufacturers are using this easing to increase their margins and this is putting upward pressure on inflation.
The shock interest rate rise in early January was likely caused by severe unease at the CPI inflation rising to 3% (RPI was 4.4%) - very close to when the Bank of England Governor is obliged to write a formal letter explaining himself to the Chancellor. There are significant downside risks to inflation rising - though the minutes of the meeting gave some comfort to the more optimistic analysts that because the vote was 5:4 for an increase and all the normal internal banking hawks actually voted to hold rates, that there may not be a follow-up interest rate increase in early February. PropertyInvesting.net gives it a 50/50 chance of an increase in February - if no increase takes place in February, we give a 50/50 chance of a rise in March. After rising to 5.5%, we think there is a 50% chance we will have reached the top of the current interest rates cycle because inflation rates should - all being well - drop to 2% by about September 2007. (For more analysis - read our Special Report: Which way the UK Market and Why?)
Will 2007 see a crash like in 1990?
Abbey National recently commented that there were many similarities between the economies of 1990 and 2007 - after seven unbroken years of house price and economic growth, inflation rose to 7.5% in 1990 (interest rates to 15%) whilst in 2007 the RPI has increased to 4.4%. Margaret Thatcher lost power - as seems the likely fate of Tony Blair. However, there are some fundamental differences which should prevent a crash this time:
Globalization and the internet: have created great efficiency gains, cost reductions and reduced the pressure on inflation - India and China have helped enormously in providing cheap imports - manufacturing and distribution are now far more global with trade barriers dropping.
Population and GDP Growth: The UK, US, Chinese and Indian populations are growing at a fast rate - the younger workers provide the engine for continued growth. The use of technology and rapid transfer of innovation globally feeds through to greater wealth and this is driving up asset prices. Core inflation is low, but asset prices, company values, earnings are all growing rapidly. The Chinese economy has grown at 8-10% for the last 7 years - and India economy has grown at about 7-9% for the last 5 years - so why wouldn't their property prices rise by at least this amount each year to keep up with growth? The UK has grown at rates of 2-3% for the last 7 years - with earnings growth at 3.3 - 4.5% - again, no surprise house prices have risen significantly. Unemployment has dropped in almost all western countries in the last five years.
Easier Money: Easier access to borrowing and competitive mortgage rates with many different deals means it is now easier for people to borrow larger amounts to fund property purchase - how long this will last is debatable, but rather than three times earnings multiples we had in the 1980s, we now have 7 times earnings multiples in the UK.
High earnings: In most developed countries, earnings growth is running well ahead of core inflation - in the UK, earnings growth in 2006 was 4.4%, whilst CPI inflation was 2% - taxes have risen, but not enough to dent consumer confidence.
Not yet out of reach: Many people mention they cannot understand how young people can get into the housing market - the answer is, they get help from their parents. Years ago, with large families and small asset values, parents did not give help for deposits on mortgages. Nowadays, if someone downsizes from a house in London worth say £600,000 to a cottage for £400,000 - they might give their two offspring £20,000 each as a down-payment on a £200,000 flat and still have £160,000 left over. This has helped keep house prices moving upwards.
High Net Worth Individuals: Wealthy buy-to-let investors, city bankers with big bonuses to invest and institutions re-balancing their portfolios with more property investment have fueled asset price growth - this seems unlikely to stop in the short to medium term. The start of REITs plus certain property related SIPPs investments have also helped fuel asset growth.
Track Record: Property prices have risen on average 8% a year in the last 100 years - anyone keeping gearing to 80% during this period would have seen a return on equity of some 40% a year. Property is about the only investment the average person understands - most people make property purchases and hence one can consider all these people as property investors. It's tough to find a simpler way of achieving high returns than to invest in property given some good research to determine the right property, in the right place, bought at the right price at the right time.
A crash looks unlikely though it can never be ruled out completely.
South Africa - property investing
The PropertyInvesting.net team visited South Africa to provide some insights for our visitors. Starting with the Cape Town area - it's absolutely beautiful. Dramatic scenery, lovely beaches, history, culture, low prices, a growing economy and amazing "Mediterranean" climate - similar to central Italy. Only problem is the crime - you have to "watch your back" and "don't be too trusting". As we have described before, the retiring babyboomers with high net worth will be looking for select properties with sea views, sun, sand, sailing, scenery. Most of the British at Cape Town airport seem to be over 55 years of age.
You have all this on the coast road from Cape Town through to Sea Point, Cliftonville, Bantry Bay, Camps Bay, Llandudno to Hout Bay. Camps Bay - Bantry Bay are the closest you will get to the St Tropez of Africa - the best beach front penthouses now sell for £1 million. Cape Town harbour is rapidly developing with nice marina, shops and restaurants - and good maritime history. The St Clements area suburb of Cape Town has big executive houses with good security - these make popular long term corporate rentals. Most living costs are half what they are in the UK - no sign of this changing. Hout Bay is a more family oriented alternative residential area and is definitely up and coming - some new select gated developments are being built, the town does have a growing Township of squatters. Further south along the dramatic coastline is Hoek Bay - a rather Bohemian place frequented by surfers - definitely up and coming. Likely to become more mainstream and popular in the next ten years.
The economics of South Africa are less compelling - GDP growth of 3% is not stellar by any means. The Rand has dropped from 10 to 14 to the pound - this despite metal prices booming. It's still difficult to take Rand out of the country. Commissions on property sales are high - like in Spain. Manufacturing centred in Johannesburg is doing well, but they have to compete with India and China, so the longer term outlook may not be so good. The crime problems don't seem to be getting any better. So South Africa is not without its risks though any property investor visiting Cape Town and seeing Table Mountain, the Seven Apostles and all the beautiful beaches, wildlife, wineries, sun, sand, sea, scenery and culture will feel like buying a property.
Prices rose the strongest in Pretoria last year - 45% in some areas. This area used to be one large Township - now many locals have jobs in manufacturing, mining and land and property prices have risen accordingly. Not for the average investor but for the more adventurous - could be with considering. In the Cape Town area, prices rose about 16% and are expected to rise by a further 7% this year.
Other developing cities are Durban on the east coast and Johannesburg the capital and main financial centre - crime is still a big problem, so research is important.
Prices have started to flatten off now - so the big boom has ended - if you invest in South Africa, it will undoubtedly be a bet on the strength of the Rand. And any hike in oil price will hit the country hard - or tax on airline fares in view of the distance from Europe, Asia and USA.
But the Football World Cup in 2010 will likely boost prices in the main cities - Cape Town will see a big new stadium being built about 1 mile south-east of the harbour / marina - properties close to the action are likely to see values rise at a higher rate than the average area.
Sick of Tenants - Buy Some Land
Most Buy-to-Let investors never intended to become professional Landlords - they only got tenants in to help pay the mortgage. Tenants, like all other human beings, can be difficult to manage - one reason is, one cannot control them - they can be unreliable, or worse, dishonest and untrustworthy. They may even damage your property - at the extreme on purpose. The stress of managing tenants has led many a buy-to-let landlord to consider selling up.
If you want an easier life, you might consider selling up and buying land. The great thing about land is - you don't need a tenant, unless you decide to rent to a farmer that is. If it's a building plot, you don't need to do anything with it - a fence is all you need - even if the fence breaks, you might not need to fix it. The big problem is - you cannot leverage up your money like you can with buy-to-let property. Often, you won't get more than 50% loan to value, or less. And you are not likely to get any rent - even if you do - it will be very low (unless you make it into a temporary car parking).
The trick with land is getting a parcel of land that leverages you into a strong position. An example is, a parcel wedged between two larger plots that you have intelligence that a property developer needs to kick-start a major development. This is a so called "strategy plot". If you purchase it, you may be able to flip it quickly to the developer for a healthy profit.
We know of someone who became a millionaire from spotting a steep plot on the side of a road in Cornwall - it was completely overlooked - but he managed to get planning permission for a block of flats - the plot looked out over the sea - a developer bought it from him. He made a 1000% return on investment.
The key thing about land is - spotting an opportunity preferably one that no one else has spotted - and when you have spotted it - securing an option on it. Many land deals break down because the land owner either distrusts the purchaser or likes the idea of selling it then goes to someone else for a higher price or better terms. Land is a very emotional asset - many land owners have had land in their family for years - they like to stay in control and do not like to lose control during the deal making process. So how you relate to the land owner is particularly important. We suggest you give references to prove you are trustworthy - if you are acting for a company, this may help. If it's a well known land company, even better. But land deals are also open to individuals - and you'll have to try and learn as you go how best to treat each land owner.
Some will want to spend lots of time building a relationship before doing a deal - others will work faster but may take their impression on their first encounter with you. It's a tough business line - but the rewards are tremendous. It will take much time, scouting for land, knocking on doors, having meetings, persuading owners why they should sell to you. You might scout and identify 1000 plots of land, approach 100 owners and get a meeting with 5 of them. Only two might lead to options on a plot of land and one to an actual sale. If you like certainty and not being rejected, it will not be for you. If you like to follow a system, like making cold calls, investigating ownership, are highly motivated and do not mind being told to walk, it could be just the business. It's possible to do the job whilst working full time, but visiting people during normal office hours is most common - so you might struggle if you have a full time job.
Be aware, any piece if land is a potential value creating opportunity. If you envisage you can purchase at below market value, quickly add value (e.g. by gaining planning permission), and the plot is marketable, then you will make the biggest profit. Don't expect to make any money buying a remote piece of Scottish Highland. But if you buy a 2 acre agricultural plot next to an intersection on the M25, then get planning permission for commercial development, you might make £2 million in six months. If you buy a ½ acre plot in SE England for £20,000 without planning permission, then gain planning permission for a 4 bedroom detached executive house, the land will be worth around £180,000 - a £160,000 gain in six months.
London - the Olympic Effect
Prices have risen up to 25% since the Olympics was announced in July 2005 in many of the areas close to the Stratford Olympic site. Interestingly, Stratford itself has not performed so well - only a 12% increase. This is probably because prices have already risen from £30,000 in 1992 to £180,000 in 2007 for a 1 bedroom flat, so the differential between a west London flat and east London flat is not that high anymore. The best performing areas have been Leytonstone and parts of Hackney - probably because of the good stock of Victorian properties.
You can still purchase a 3 bedroom Victorian terrace in Forest Gate for £300,000 (with unconverted lofts) - this would sell for £600,000 in an average area in west London (e.g. Acton, Earlsfield). If you are looking for a Victorian property close to Stratford Station, it will be hard to find. There is a nice enclave about ½ mile south-east called by local agents "Stratford Village" where a fairly small 3 bedroom terrace will cost about £350,000 - but there's normally a waiting list and these properties don't seem to come readily onto the market. They benefit from being on the edge of Ham Park, ½ mile to the tube and ¾ mile to the new High Speed One station, due to open next year (Paris about 2 ¼ hours away, Brussels about 2¾ hours away). You'll never have any problems renting such a property. Much of Stratford is bleak and some parts look like a building site - this could also explain 
why prices are slow to rise. Take a look at Hackney Wick - this is a beautiful Victorian area with a village feel with excellent road communication and only 2/3 of a mile to the new Stratford International station. The southern fringes of Leytonstone and Wanstead Flats have some nice big Victorian houses - which will be very popular in years to come with West Londoners who settle in the East after improvements in communications and after the Olympic park is built - some £5 billion of investment is expected, along with £2 billion on the retail and office complex around the next Stratford International Station.
Other areas which will do well are Bow - equidistant from Stratford, Docklands and the City. Limehouse basin - the upmarket marina area half way between the Canary Wharf and the City will also benefit. Canning Town and Silvertown, two rather bleak 1960s housing estates have excellent communications and crime levels are dropping - worth considering for higher yield higher risk property investment. Plaistow and West Ham are also close to Stratford, they are cheaper and most areas are a bit down-at-heel but regeneration has been taking place for years - the areas will benefit from close proximity to the Olympic Park down the Lower Lees Valley and from being only 1½ miles from Stratford International Station.
Other areas worth considering are Woolwich which will shortly get an extension to the Docklands Light Railway and New Cross Gate, Peckham, Brockley and Syndenham which will almost certainly get a new tube service by about 2011 - the long awaited East London Line extension - which will whisk commuters to Wimbledon, Croydon and Hackney via the City. A new station is planned at the intersection on Surrey Canal Road (next to the incinerator) just north of New Cross Gate.
Finally, it's difficult to see house prices in London dropping because of the 800,000 people arriving in the next ten years, not enough homes being built, GDP growth of 4%, earnings growth of well over 5% for banking/ services staff, the Olympic effect and London preeminence as a global financial centre - Middle East and Asian investments will help banking and property in London and the general economy. The Government and Bank of England would not allow London house prices to crash because this would imply prices in the north and midlands would melt-down. The bank would react by dropping interest rates - unless inflation ran way out of control - something that currently seems unlikely to happen.
USA - what about the crash? - any value left?
Doom-mongers have been predicting a property crash in the USA for some time. However, if you look at the price of US real estate, it does not seem particularly high compared with Europe and even some parts of Asia. Although some areas have dropped slightly, there are no signs of a crash. The USA economy is huge - the country has massive natural resources - coal in abundance, land, forests, water, oil and gas and vast agricultural areas using the latest technology. Jobs growth is strong - particularly in non manufacturing areas. Meanwhile, the country is quick to adopt innovation in most technologies (automobile industry being an exception). The population was 150 million in 1950, is now 300,000 and will rise to 450,000 by 2050. Okay, the balance of payments deficit is not good - but that's been a problem since Ronald Reagan's time. Serious crime rates gave dropped by half in most areas in the last 15 years. Interest rates have shot up from about 1% to 5% in three years so it's little wonder house price growth has stalled.
But GDP growth is still a healthy at 3% and although inflation is rather higher than Bernacker would like, it seems to be fairly well under control. It looks like the USA may be close to the top of its interest rate cycle - the dollar will likely decline further against the Euro and Yen, particularly if rates drop soon. The USA is no longer the global growth engine - this mantle has passed to China. It's still the most important economy in the world, but China and India will catch up in the next 20 years. The aging babyboomers will be heading to the sun for retirement - pulling on the pensions which will become particularly disruptive in 2016 (pensioners will be forced to pull on their investments). Its global leadership in finance is being strongly challenged by London - 7% of business moved from Wall Street to London in the last three years after Sabine-Oxley and closer regulation has encouraged hedge funds and private equity to move to London's more liberal regulatory environment.
For the international property investor, it's now more difficult to see value in property investment in the USA. One can envisage prices staying flat or rising slowly, but with the dollar falling against the Euro and Sterling. Coastal areas of the western Florida pan-handle still look good value - they also tend to avoid the worst of the hurricanes.
The rapid population growth in Florida, shortage of land and increasing environmental constraints along with all those retiring babyboomers from NE USA will likely lead to higher prices in Florida in the coming years. Increasing tourism will also help cities like Orlando and Miami particularly if there are no big punitive taxes on flying (ref: climate change).
For more on US Property Investment - refer to our Special Report: US Property Investment - Advice and Insights - written some time ago, but still relevant.
Concluding Remarks
We hope your New Year has started well and
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