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    Home > News > London Property – The Benefits of Leverage

    London Property – The Benefits of Leverage

    Tuesday, April 7, 2020

    In the modern age where communication is instant and information comes at the press of a button, traditional investment is being forgotten as people fast track their investments and expect immediate profit.

    With residential property in London, there is an opportunity to “trade” over the next two or three years and make profits. An investor will probably be able to place a deposit on a flat in a new build project now and “turn” that investment for a profit that might well double the cost of the 10% deposit in two year’s time.

    This short-term thinking might well work in the market I see in front of us over the next few years while we have a housing boom on our hands, however lets look at the long-term play and what it does for us.

    In 1998 I bought a building in the Soho area of London and refurbished it into five flats. These apartments were really one bed units but we created a “wall” that was flexible in order to offer two bedrooms as these units were 700 sq. ft. plus and so from a practical perspective they could be utilised as 2 bed 1 bath flats.

    At the time, the flats were sold to five buyers here in Hong Kong. (Four of them remain buyers/clients to this day).
    The flats were sold at prices of £220,000 – £247,000. The difference in prices were due to slightly different sizes (variation of 50 sq. ft.) and the floor height in the building.

    Three years ago one of these buyers sold his unit for £780,000. Two years ago another of the buyers sold his flat for £835,000.

    If we just average all this to make a rough calculation, a £230,000 purchase becomes worth £810,000 in a period of 20 years. A very healthy profit of 240% less costs.

    However it gets a lot more interesting when we look at the leverage.

    Both these buyers obtained 70% mortgages, so, again roughly, a deposit was placed of £70,000.

    One should add closing costs and the cost of two furniture packs over a 20-year period and one re-decoration. Those costs would come to roughly £30,000 if we exaggerate a little.

    Assuming an interest only mortgage which would be covered by the rental, we would actually see rentals go up and create a surplus over the interest rate over 20 years, but let’s just assume breakeven on interest paid versus rental received.

    This would mean that cash utilised of £100,000, would result in an internal rate of return of 10%+ p.a. over a 20-year period.

    There are very few investments around, backed by the security of a London property that will yield a net 10%+ p.a., so for the long term, London provides a unique advantage to the investor.

    This leads us on to the future. Can we predict a stable growth curve In London property over the next 10 to 20 years that will replicate this scenario?

    Two indicators are worth looking at here:

    1. Historical growth of London housing over last 50 years

    This graph clearly shows a line that compounds upwards, the only one pause in the upward trend which was for a period of two to three years was in 2007/2008.

    We have now had another pause from 2016-2020 due to Brexit, which is not illustrated here.  This latest pause indicates that the timing is superb to invest in London residential property now.

    2. London Residential supply Crisis

    London housing has become an internationally traded commodity over the past 30 years.

    Any commodity is driven by two key factors – supply and demand.

    For decades the housing supply in London has not expanded to serve the increasing demands from both residents and overseas investors.

    The UK housing system only responds to economic downturns so housing investment is cut back quickly, while it under responds to increasing demand.

    This has meant less and less housing being built.  30,000 homes per annum were built during the 1990’s / 2000’s and 2010’s.  Far below the average 66,000 needed p.a. under the Mayor’s “London plan”.

    The effect of this is a massive build up of cumulative shortage and no signs that London is getting any nearer the 66,000 target p.a. needed.

    Current figures show that in the last three years the average numbers of homes built per annum has barely reached 40,000 p.a.

    To take advantage of the current buying window, view new build projects @ www.gihlondon.com

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