CASHING IN ON PROPERTY
04 August 2015
Property was traditionally viewed as a steady investment that would grow in value over the medium to long term, not double in value within two years or indeed 10 minutes because of new planning permission. Many of those who simply speculated on the property market and traded or “flipped” property for a quick capital gain are long gone. However, those experienced investors who have been in it for the long run are now seeking to return to the market.
Direct property investment is re-emerging as a preferred investment class due to poor returns on cash deposits and enhanced market sentiment. It’s a case of “back to basics, accepting that it is prudent to take a 10-year view on property and acknowledging that capital growth will be steady rather than instant.
At present the Northern Irish property market is being heavily influenced by ‘Loan Sales’. Recent claims surrounding the sale of the NAMA loan portfolio have assisted in bringing this to the attention of the general public, but ultimately the main impact on the market to date is a lack of good quality supply. With this in mind, demand for good quality investment product is outstripping supply; this has resulted in competitive bidding between cash rich investors for the attractive assets that do become available.
Osborne King recently sold an investment on Belfast’s Dublin Road which is let to Tesco and a local pharmacy. The property was brought to the market with an asking price of £2.25m reflecting a Net Initial Yield of 7.28%. Following a competitive bidding process the property was sold for £2.65m reflecting a NIY of 6.18%. The current level of demand and evidence of tightening yields is further supported by the sale of another Tesco investment on Royal Avenue, Belfast.
On this occasion the sale price achieved was £975,000 reflecting a NIY 5.43%. In reality these yields are at least 0.5% tighter than what could have been achieved 12 months ago.
In recent months we have seen a significant rise in the acquisition of office premises for owner occupation. Increased market confidence relating to investment property has also has a positive impact on prices in his sector.
Again the “back to basics” principles apply. We have seen a number of buyers choose to invest cash reserves in property knowing that their business will be in occupation for the medium to long term.
In simple terms, by paying a “notional rent” over 10 years, for example, the property will effectively have paid for itself leaving an unencumbered asset as opposed to paying rent for 10 years and having nothing to show for it at lease end.
Examples include the acquisition of a stand-alone office building in South Belfast on behalf of a charity organisation. The acquisition price of £375,000 reflected £105 psf, which was still less than the cost of building new premises never mind buying a site to put it on!
We also recently sold a floor in Causeway Tower, James Street South, on behalf of a private individual, which was originally acquired in 2012 and sold for £250,000. The sale price reflected over £100 per sq ft and represented a substantial return on the client’s original investment.
All in all, there are clear opportunities for buyers and sellers in the current market. Anyone who bought a good quality investment or office property during the lower ebbs of the market in 2012/2013 could reasonably expect to see some capital appreciation as the market continues to recover. The outlook is very positive and there is no doubt that good product will be rewarded with strong pricing.
Whilst it isn’t totally clear what long term effects current loan sales will have on the market, general sentiment remains upbeat and the market continues to move forward. Hopefully as the wider economy continues to improve we will keep going in the right direction.