The Risk of Buying UK Property Just for Capital Appreciation

The Risk of Buying UK Property Just for Capital Appreciation

We have been in this story. I have seen this happen when I was growing up with condominiums on the Florida coast as well as recently from London to Manchester in 2006…

Buying off plan with the “hope” of capital appreciation.

We all know how this ended…Very Badly!!!

So why is it still happening. I see London investors looking at 2% Gross yields on buy to let.

In my opinion this is a recipe for disaster again.

UK buy-to-let yields are no longer what they were in the days of double digit yields. They are now closer to the 5% to 6% mark (gross) on average unless you are creative and refurbish a property. This is exactly what we do and offer our investors 8-9% NET yields. We look for properties that have refurbishment needs and bring them back to life. We have a kitchen designer, we try to put in the most wonderful bathrooms and put all the small touches in order for our investors to have pride of ownership. Further more we do not look for Gross yields…we go for Net yields. There is a world of difference. We tenant our properties with social housing. It can be anything from a charity to the Home office appointed manager for a niche of social housing. These have guaranteed rents for 3-5 years. The name of the game is risk. We try to diminish our risks as well as our investors.

When buying for capital appreciation the inherent danger of rising interest rates can destroy an investment. Tighter lending is now being clearly evident. If the easy credit taps are switched off, that will cap house price inflation – which is the only thing that has been compensating for low yields. Compounding the risks I see when just looking for capital appreciation is that many prefer to remortgage. They extract the capital and use it to buy more properties. Remortgaging now accounts for two thirds of all buy-to-let mortgage transactions. Seems like a domino waiting to fall.

What do you think?