London property investments have been making headlines lately, with record numbers of Irish investors attracted to the relatively lower prices and higher rental yields.
One financial adviser who is concerned that the wrong people might be attracted to the hype surrounding these property deals is Mr Eddie Hobbs, director of the fee-based financial planning company, FDM, which has prepared a survey on British property deals.
Investing in British commercial property has picked up as a natural reaction to the skyrocketing cost and shortage of suitable properties here, he explains. While there are some advantages, including higher yields, a wider choice of properties and good timing, with the British property market not overheated as it is here, there are also disadvantages.
"There are three elements that need to be considered when you invest in property," says Mr Hobbs: "Value, rental and tenants. The real, internal rate of return on your investment takes into account the appreciation of the capital the property over the term as well as the actual rental yield." What every investor needs to do, before plunging into such a market, he says, "is to carefully compare the net cost of borrowing versus this internal rate of return".
The main disadvantage of British property investing at the moment is the high cost of borrowing, with base interest rates at more than 7 per cent and actual variable borrowing rates in the region of 9 per cent.
Since property investment is all about gearing putting up a small portion of the downpayment yourself, usually about 20 per cent, and borrowing the rest interest rate movements are crucial. With Britain staying out of Economic and Monetary Union the differential between borrowing rates in Britain and countries that are in EMU could be as much as 4 per cent, says Mr Hobbs.
With sterling out of EMU, you need also to accept that there will be risks associated both with the purchase of the property and in
servicing the loan once the deal is done. "If you put a downpayment on a property one month and the currency swings against you a few months later when you have to complete the sale, you may have to pay a lot more," says Mr Hobbs. There is also the servicing risk. Your rent is being paid in sterling and since you are offsetting that against your borrowing costs you need to factor in occasional deficits if there is a fluctuation."
Once Britain joins EMU the currency situation will improve significantly and debt servicing will inevitably fall, he says.
Overseas property deals are becoming easier to arrange because they are becoming better packaged, says Mr Hobbs, with estate agents, valuers, lawyers arranged to complete the deal. Everyone, however, is "working on a margin. You need to be very careful about the advice they give you, and keep in mind that everyone wants you to buy the property. You need to physically go over a couple of times to see for yourself what is on offer. Never buy off the page or after a cursory visit."
Asked what kind of person is a good candidate for British property investment, Mr Hobbs suggested someone who has already invested in Irish commercial property, is over 35, a professional with a strong and rising income and "who has already experienced some investment ups and downs". Ideally, this person should be considering buying properties worth between £500,000 to £1 million, though syndicates might be looking for £100,000 injections per member. This person needs to have total realisable assets in the £500,000 range, he says.
"Whatever way you look at it, investment property carries risks. The problem with new Irish investors," says Mr Hobbs is that "we've never had a property crash here, mainly because we've been a poor country up to now. They've had them in the UK, in Japan, in the US and it has wiped out many." Anyone thinking of a sizeable investment in Britain needs to prepare themselves for that kind of eventuality.
For more information on British property offers contact FDM on 045-442051.
