Help To Buy – What Does It Mean For Investors?

The cynically-minded might suspect politicians are at least open to the possibility that there will be (another) snap general election, since they still seem to be in campaign mode.  The latest salvo from the Conservatives is to announce a £10bn boost to the Help to Buy scheme, which it expects will help another 135,000 people get on the property ladder.  The reaction to this news, however, has been varied in the extreme with some groups welcoming it and others criticising it for stoking a heated market.  Property investors may reasonably be wondering what it means to them and when considering this, it’s worthwhile taking note of three, key points.

135,000 people out of a population of 65 milliom

The blunt fact of the matter is that while £10bn is a significant sum, the government only expects it to help about 135,000 people out of a total UK population of over 65 million people.  Admittedly that total population figure includes people who are highly unlikely to be in the housing market, such as children who live with their parents and will include many couples who will only require one property between them, but whatever way you look at it, it is a very small percentage of the population as a whole.  The Home Builders Federation estimates that the scheme has helped about 200,000 people buy a new home in the last four years, accounting for 1 in 12 of all sales to first-time buyers.  While this is clearly a boost to the home-building industry it still means that 11 of all 12 sales happen outside of the framework of the Help to Buy scheme.

The mortgage market review is still in effect

The basic idea behind the Help to Buy scheme is that a buyer puts up a 5% deposit, the government adds a 20% equity loan and a mortgage lender provides the remaining 75% of the sales price.  This approach obviously lowers the bar to getting a mortgage, but does not and indeed cannot remove it.  Buyers still have to show that they can meet the affordability criteria and, in particular, that they can make their mortgage payments over the long term, even if interest rates rise.

Markets are governed by the laws of supply and demand

While the Help to Buy scheme may be politically appealing to some people, the fact of the matter is that the dynamics of the housing market are dictated by the laws of supply and demand and in the UK there are a number of reasons why supply is constrained, one of which being the challenges relating to finding suitable building land in the first place and then to get planning permission for developments.  In simple terms, for as long as this situation continues, the UK’s housing market will continue to be a seller’s market and making it easier for some people to access funds may simply act to push up competition between buyers and hence increase prices.

Where does this leave property investors?

For all the soundbites and media fury about the extension of the Help to Buy scheme, the reality is that in all probability it’s only going to be of relevance to a very small number of home buyers.  Therefore, while it may give a boost to home builders, realistically, it’s likely to be a very moderate one.  In other words, from an investor’s perspective, the announcement is neither a reason to panic or a reason to celebrate.

What could well be of more interest and significance to most property investors is being given information on how the government will address issues such as the supply of labour to the building trade post Brexit, what further steps (if any) they will take to facilitate the planning process and what plans they have for the leasing system.

Overall, however, the fact still remains that demand for property in the UK has long outstripped supply and that existing housing stock typically needs periodic upgrades, hence the UK property market looks to have a positive future over the long term.

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Why Developers Need to Prioritise Affordable Property

Mention the word “affordable housing” in the context of property development and the chances are that many people will automatically (and understandably) think of the requirement for (most) new developments to include a certain percentage of what is officially considered to be affordable housing. Let’s set this aside for one moment and focus on what the term “affordable housing” actually means, which is exactly what it says, houses people can realistically afford and the reason developers need to start prioritising this is because it’s the only way for them to maintain sustainable businesses.

Why the internet could put UK-based property developers out of business

Terms like “digital nomad” and “coffee-shop professional” may sound pretentious, but they reflect the way the nature of business is changing. There have been “home workers” throughout history, but as the world industrialised, the idea of “work” came to refer to a place as much as an activity. Now not only is it increasingly possible for people to work from home, but it is increasingly possible for that home to be far away from where their clients are based, even in another country. The digital economy, for example, is arguably truly global. Set against this backdrop, it is hardly surprising that digital workers and skilled professionals, particularly young ones, the famous millennials, will be looking at their options and asking themselves if they really want to stay in a location where they will be forever renters or move overseas to somewhere they can afford to buy. An exodus of young adults will ultimately be felt not just in the first-time-buyers market but later on in the market for family homes and then retirement properties. This may seem like a far-fetched scenario, particularly since Brexit may make it far more difficult to emigrate to another European country, but the reality is that many countries actually want to attract skilled talent, particularly younger adults.

Developers need to concentrate on delivering value rather than up-selling

Up-selling is key to many sales strategies and it’s everywhere, from online retailers who suggest purchases based on your browsing history to supermarkets placing “treat” purchases at strategic locations (particularly next to the tills). It’s also, often, part of the strategy for selling homes. Developers can add desirable features, anything from luxury finishes to steam showers and put a mark-up on them. This may actually deliver genuine value to the purchaser in the sense that even though the developer makes a profit on these items, the developer’s bulk-buying power can mean that it is still possible for them to deliver these niceties to the customer at a much lower price than the customer would have paid buying retail. At this point, however, the problem is that land values in the UK have driven house prices up to such an extent that potential buyers, especially younger ones, are being driven out of the market and, as previously mentioned, there is a strong possibility that this will result in some of them at least choosing to move overseas instead of staying in the UK.

Time for a radical rethink of the UK property market?

Sometimes when you appear to be up against a rock and a hard place (rising land values and other costs versus stretched buyers), the solution is to try something entirely different. For example, co-living spaces are popping up across the world and are currently making their mark in London. These are essentially spaces where residents have very limited private space, which is compensated by access to communal spaces and communal facilities. At current time, these are focused on the rental market, however in principle there is nothing to stop the idea being adopted for the sales market or adjusted to make it more suitable for families as well as those pre- post- or without children.

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Brexit & The Property Market 1 Year On

The Brexit referendum of 23rd June 2016 feels like a long time ago. It took almost 10 months for Article 50 to be triggered (on the 29th March 2017). While this marked the start of the two-year negotiating period, the start of the actual negotiations was delayed by the fact that the UK parliament called a general election for 8th June 2017. Hence we now find ourselves about a year on from when Brexit was first decided and it’s interesting to take stock of the situation.

Home sales are down but is Brexit the only reason?

According to figures from HMRC, housing transactions in the second half of 2016 were 9 per cent lower than in the second half of 2015. Given the timing, it’s hard to dispute that the result of the Brexit referendum would have played a part in this. At the same time, however, it’s an open question as to whether Brexit itself was the only reason or even the main reason. Taking a step back in time, the Summer Budget of 2015 saw a change to mortgage interest relief for landlords, which had the potential to cause a significant negative impact to the finances of higher rate taxpayers who were also landlords. Shortly after this, the government also announced the “Right to Rent” scheme, which was rolled out in February 2016. Both of these changes were pre-Brexit and both could well have motivated at least some landlords to exit the market or at least reduce their portfolio, which could potentially account for at least some of the drop in transaction volume between 2015 and 2016.

House-price inflation in London stalls

Overall, London is still experiencing house-price inflation, just at a lower rate than in recent years. Again, Brexit could well be a factor in this, particularly the fact that the City is openly nervous about where it will stand in a post-Brexit world. At the same time, however, it should be noted that the 2012 Olympics led to parts of London being significantly regenerated, which caused substantial house-price inflation. During the intervening five years, these increased prices have become a new reality and there is nothing of the nature of the Olympics currently on the horizon to give house prices another boost. At the same time, successive governments have been investing in the north of England, with the Media City initiative beginning long before the concept of the Northern Powerhouse was first mooted. Northern cities such as Manchester have been experiencing house-price inflation at higher levels than London, which suggests that at least part of the slowdown in the London housing market, could be the new competition from further north.

The mortgage market carries on

Arguably the biggest shake-up of the mortgage market in recent years came in April 2014 as a result of the Mortgage Market Review. In very simple terms, lenders now have to look beyond a borrower’s headline income and analyse the real-life affordability of a loan over the long term. Given that Brexit is effectively a step into the unknown, it’s hard to see these rules changing to become less strict at any point in the near future, so in that sense, it’s likely to be business as usual regardless of what form Brexit takes (or even if it’s cancelled). Where Brexit could potentially impact the mortgage market is if it results in upward pressure on inflation. This would not only impact affordability calculations in and of itself, but also place the Bank of England under pressure to raise interest rates and therefore the cost of financing, which would probably be most unwelcome to those with existing mortgages and could potentially discourage people from entering the housing market or moving to bigger properties.

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How Leasehold Should Work

Leasehold is a unique feature of the English and Welsh property markets and up to a point it makes a certain degree of sense. For example, the fabric of a block of flats may need to be managed as a single entity, even though each of the flats themselves may have a different owner. For similar reasons there may be some logic to having a leasehold arrangement for terraced and even semi-detached homes. Currently in the UK, however, even detached homes are being sold on a leasehold basis. What’s more, the manner in which some leaseholds are being run is so archaic and feudal that it would be fair to call it a national scandal.

The history of leasehold

Although the basic leasehold system dates back, literally, hundreds of years to the Medieval feudal system, the modern concept of leasehold effectively started in the 1920s. It basically allowed landowners to rent out their land for very long periods, thus guaranteeing themselves an income from it regardless of changing circumstances. It really took off in the 1950s as the population grew and housing developments increasingly focused on flats, which could contain more housing units in less ground space. In the 1960s, however, the shortcomings of modern leasehold began to become apparent as elderly tenants started facing eviction as their leaseholds came to an end. Since then the problems with leasehold have only been getting worse.

Leasehold in 2017

The National Leasehold Survey 2016 revealed that 57% of leaseholders agreed with the statement “I regret purchasing a leasehold property”. In other words, less than half of leaseholders surveyed are happy with their situation. Looking at stories featured in the press, much of this discontent seems to stem from home builders selling on freeholds to third parties, who then increase ground rent charges in a way which is completely unrelated to either inflation or the cost of the services they provide (if any). Some home owners have complained that the freehold to their properties was sold on without their knowledge or that when they tried to buy the freehold, they were quoted a completely unrealistic price for it. Some home owners have even been advised that their leasehold situation effectively makes their homes impossible to sell as mortgage lenders will not lend against homes with what they perceive to be excessive rent review clauses. Others have complained that even minor changes to their homes trigger extortionate fees from their freeholders. While the push towards creating more new-build homes is desirable for many reasons, it does mean that more people are going to find themselves dealing with leaseholds for the first time and that means that the scope for discontent is even higher than it is now – a fact, which has been noticed by parliament with housing minister Gavin Barwell calling the current leasehold system a “widespread problem that needs addressing”.

Looking North for alternatives

In Scotland, leasehold properties are the very occasional exception rather than the rule. The issues surrounding management of the fabric of buildings such as flats and other communal areas such as gardens are addressed by means of what are called Deeds of Conditions. Often, these deeds of conditions will involve the use of what is known as “factoring services” to carry out maintenance duties. Although this system is still far from perfect in that home owners can be left dissatisfied with the way the factoring company performs its services (or not as the case might be), it does resolve a number of the issues related to the leasehold system in England and Wales. It is also entirely possible that the Scottish government will heed calls to review the way the factoring system operates to address some of the concerns raised.

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What should you consider before investing in property?

Keeping part of your wealth in property has become almost an investing axiom over the years and there are many good reasons for this. Having said that, there are generally exceptions to every rule of thumb, so here are some points to consider before you decide whether or not to invest in property.

  1. Does property investment fit into your overall financial/life goals at this precise point in time?

The idea of investing for the long term applies to a wide range of investments and it is generally critical to the success of property investment. If you are currently in an uncertain period of your life, for any reason, then it may be best to wait until you have a clearer picture of where you are now and where you are likely to be going forward before you make a commitment to any kind of property investment.

  1. Are you prepared to accept the fact that the property market moves at a relatively slow pace?

Some forms of investment, such as shares, can literally be bought and sold at the click of a mouse. Property investment is often different. Even high-quality and desirable property, which is clearly in the right area, takes time to buy and sell, if only because of all the legal boxes which need to be ticked. With other forms of investment, it can be perfectly feasible to sell one form of investment quickly so as to have funds readily available if a better opportunity presents itself. With property investment, astute investors have to be prepared to adapt a strategy which is suitable for the slower pace of the property market and either always keep funds available so as to be able to act quickly when new opportunities arise or be willing to plan changes well in advance.

  1. Is property investment actually a topic which interests you?

This may seem a strange point, since the aim of investment is to make money and, depending on the aim and strategy of the individual investor “dull” investments such as bonds and blue-chip shares can be far more appropriate than more “exciting” investments such as technology start-ups. In reality, however, successful investors need to have an understanding of their investment area(s), whatever it/they are. This means being prepared to spend time on research both prior to making the initial investment and, on an ongoing basis, to ensure that the investment(s) continue(s) to be appropriate to their needs and wants. Doing this research is likely to be much more enjoyable if property investment is something you actually find interesting.

  1. Do you want to focus on capital gains or yield?

As an investor, you might want to have both, in fact that’s perfectly understandable, but you can only make one of these your primary focus, so you need to decide which it is. If your strategy changes at a later date, then you can always adjust your investments accordingly. If you are going for capital growth, then you are likely to find yourself looking at different kinds of investment properties than those who are mainly interested in yields. For capital gains you may well find yourself looking at property in up-and-coming areas and/or property in need of substantial refurbishment or with legal challenges such as short leases. For yield, you are more likely to be looking for property in areas which meet certain criteria in terms of quality of life and which have the demographics which interest you, be that students, families, international professionals or retirees. You may also be more interested in quality new build property, since it will come in liveable condition and will also come with a builder’s guarantee, for an additional level of reassurance.

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Top 5 Property Development Mistakes

If daytime TV is to be believed, anyone can make a career in property development and can somehow managed to turn in a respectable profit on a property in spite of costs and building time both being substantially higher than expected. In the real world, most people realise that if it was that easy, everyone would be doing it. If, however, you do want to develop a property yourself, either as a career or as a one-off project, here are the top mistakes to avoid.

Buying unsuitable property or land

If you fall in love with a place to live and you want to develop it yourself from start to finish to be your dream home, then what you buy can be guided entirely by your own preferences. If, however, you want to make a profit out of the development then you need to ensure that any property or land you buy has decent commercial prospects. Often this means making yourself thoroughly familiar with the local area as a whole and understanding what the future is likely to bring.


In principle a lender should pick up on whether or not you are over-stretching your finances, but at the end of the day, it is your responsibility to manage your money. Starting out on a stretched budget before you’ve even started your project is, quite bluntly, a way to set yourself up for heartache and wallet ache.

Underestimating the money and/or time required

Learning to price developments accurately is vital for anyone who wants to make a career as a property developer and is still hugely important to anyone taking on a property development project for their own interest. Property development companies check their figures very carefully before committing to any commercial project, they also have extensive experience to guide their judgement. Amateurs are probably best advised to check their figures as best as they can and allow themselves a substantial financial cash cushion in case of error. Similar comments apply to estimating the amount of time required for a project. Getting this wrong can seriously damage your budget.

Failing to understand the importance of a professional and independent architect.

As a rule of thumb, if a project is substantial enough to need planning permission, it probably needs an architect’s involvement and even if it isn’t an architect could still be very useful. Employing an architect directly means that their only responsibility is to you, their client. Using a builder’s architectural services can set up a conflict of interest since the decisions which make the highest level of profit for the builder may actually be the wrong ones for your property and unless you really know your way around property development well enough to pick up on this, you may wind up spending a lot of money for little to no return.

Getting the wrong builder

Sadly, cowboy builders are a fact of life rather than just a TV fable. It’s vital to avoid them (an architect can also come in useful here as they often know their way around local construction companies).

Trying to pack too much into too little

This is another mistake, which may be down to the influence of daytime television. In a densely-populated country such as the UK, space is at a premium and therefore, on a like for like basis, the more people who can share a space, the more economical that space becomes. Hence people who already own homes they like may well try to squeeze a little more usability out of the space they have so they can avoid having to move (or at least delay the move). The key point to remember, however, is that spaces need to be liveable. Multifunction furniture and modern technology may have made it possible to live, comfortably, in smaller spaces, but there are still limits and this needs to be recognised.

Certainly it’s worth talking to a professional development company, it could save you a lot of the heartache but still give you similar or even better returns.

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