Real Estate Is Becoming Better Defensive Investment Than State Bonds or Equities

The case for investing in commercial real estate is now being further augmented by its risk/reward profile, diversification benefits and pricing.

At a time of great economic uncertainty, commercial real estate offers defensive characteristics not available from equities and bonds.

As a physical asset that also earns income, even in the most extreme cases, an investor in real estate would not experience a total loss.

The experience of the Lehman collapse provides a clear example of this. In contrast, it is unlikely that bondholders or shareholders will get a substantial return from the winding up process.

Even senior bondholders are expected to see a return of less than 25c on the dollar.

Contrast this with the position of the former owners of Lehman's UK headquarters. The administrator continued to pay most of the rent while the European operations were being transferred to Nomura, with Lehman's sub-tenants in the building providing additional security of income.

Subsequently, the building itself was sold to JP Morgan for £495 million.

In terms of the Irish market over the last five years, investors would have been better off owning the buildings occupied by the banks rather than shares in the banks themselves.

At times of high uncertainty and volatility in the capital markets generally, this is a valuable quality.

This is evident from the chart above left showing the relative performance of commercial property versus Irish financial shares.

Real estate displays the main features of both bonds and equities. Like bonds it offers a relatively predictable income stream, while at the same time offering the potential for capital growth (and the opposite!) akin to equities.

However, it is the rental income that is the main driver of real estate performance and also underpins its defensive capacity.

This can clearly be seen from the long term IPD figures of rental income and capital growth and loss.

Over the long run, the income return from Irish commercial real estate has been 6.7pc a year, while capital growth has returned just 2.2pc per annum.

Furthermore, the volatility of the income return is extremely low compared to the wide fluctuations in capital value.

Therefore, real estate should be looked upon as a primarily income-producing asset with the potential for modest capital growth over the long term.

Additionally, the yield on Irish commercial real estate is at a historic high and is also significantly higher than those achievable in virtually every other international market.

Based on IPD's institutional Irish property portfolio, the IPD Index shows Q1 equivalent yields at 9pc for Irish offices, which are an all time high and 8.9pc for all property, which is also at a high.

CBRE's own records indicate that Irish yields have strengthened in recent weeks and yields for prime Dublin central business district offices have tightened to 7pc from 7.25pc earlier this year and from their high last year of 7.5pc.

This analysis indicates a strong case for investment in Irish commercial real estate on both defensive and pricing grounds.

Of course, real estate is very asset-specific, and the features of individual properties can enhance or erode its fundamental attraction.

Sean O'Brien is head of capital markets in CBRE Dublin.

- Sean O'Brien

Economic Basics - The Circular Flow of Income

Firms produce goods and services on demand for the government, households and other countries to consume. They provide employment, generate income and create demand within economy. They act as cornerstone for yearly GDP (Gross Domestic Product) determination. Government collect taxes on sale of the goods (VAT) and levied taxes to maintain public sector spending and investments. The biggest leakage is transfer payments: pensions, unemployment benefits where payments are made for no actual service. Money is circulated back to firms to produce more goods and services. Households receive payments in a form of wages and salaries, dividends, shares or rent for supplying labour, capital and land; where a government takes a small portion in form of direct and indirect taxes (money leakage for the cycle). Household income is spending for domestically and internationally produced goods and services. In the first instance money is circulated back to the cycle on the second money flows away from it. Some portion is saved either using financial institution (active capital) or non financial institution (passive capital - withdrawal from the cycle). The more households consume the faster the entire cycle flows nonetheless active savings are crucial as they provide more trust for financial institutions about economical health and liquidity for further injections

Macroeconomics And Real Estate Industry

Macroeconomics is a driving force for investment industry; it looks at economy as a whole entity. Broad examinations on economy wide expressions such as changes in unemployment, rate of growth, national income, gross domestic product, inflation and price levels.

Fiscal and monetary policies are tools that governments use to derive macroeconomic objectives such as: lower inflation, stimulate economical growth, currency exchange rate controls and reduction of the unemployment rate. It is important to note that application of one policy to stimulate the economical growth may have negative effects on the other side like rising inflation, so the balance for sustainable growth must be reached.

Judgements about the status of economy can be made looking at business performance indicators that clearly presents health of the business within economy. Different professionals may consider some or derivations of these indicators as a point to determine economy level:

1.     Monetary Profits - during buoyant economic times all industry sectors are motivated to increment production levels to accommodate aggregative demand. Scarcities in supply maybe faced temporary due to increased demand, therefore rising prices of production costs and sales of goods will increase sales margins. In construction/real estate industry: building procurement contracts are preset at a fixed price therefore price increase will be benevolent only to the developer which has direct control over asset sales during aggregate demand period.

2.   Share Prices and Dividends - during peak times share prices and dividends tend to rise due to growing company performance levels. Expensive access to capital may push down share prices further leaving no dividend payments between investors. Real estate industry is correlated to stock market and can be judged from the health and trading activity of real estate securities and traction of the real estate related indexes. For UK market it is benevolent to tract FTSE indexes and their derivatives as they cover retail, office, commercial, industrial sectors and performance comparison to gilds and all stock indexes over selected time.

3.    Cash Flow is tend to increase during economical boom time due to increased sales, accessible finance and increased demand. During recession companies may face difficulties turning assets into cash delaying payments for all parties involved in a business, so they must have an access to credit facility. Cash flow circulation will be determined by the strength of rent covenants and government economic stimulus plans.

4.   Running Costs; All costs in relation to running the business are tending to rise with economic progress where an opposite reaction will be on recession times. Economic rent is a payment for use of land or building space within defined geographic area. Rents tend to rise as they are derived from mortgage interest payment, land rent, maintenance and repairs fees. Mortgage interest will rise during economic peak times as a monetary control tool to diminish inflation levels, therefore every business depending on lending have to increase a service rates to compensate the difference. In short interest- is a payment for ability to have this investment under control of lending institution.   

5.    Bankruptcy Levels will be low on economic boom times, but will increase in recession due to lack of accessible finance, competition, decreased demand levels. As economy becomes buoyant new service companies will be created to meet demand and immigration increments, but with demand slowdown cuts with product, service or space consumption are inevitable. 

Real estate industry is one of the slowest investment entities to react to economical fluctuations due to long time lines to construct the assets for current demand, high transactional costs, and illiquidity of the assets. The bright side for this industry is that a many sophisticated investors use it for capital hedging, growth and cash flow purposes.

Growth in London’s Prime Property Market Slowing

London's prime residential home values rose by an average of 0.9% in the second quarter of 2012, and annual price growth slowed to 6%, as some of the heat has started to come out of the market in the early summer, the latest data from Savills suggests.

Its July 2012 report also shows that overseas buyers have remained committed to the very best central locations, accounting for 58% of buyers in the first half of 2012.

Though limited in supply, sales of new build property tailored towards the needs of high net worth overseas buyers have been particularly strong.

In central prime London growth slowed to just 0.4%. But the figure masks a divergence between areas. Prices in Chelsea, Mayfair, Belgravia and Knightsbridge rose by over 1%. Those in Marylebone, Notting Hill, Kensington and Holland Park fell marginally in the quarter.

According to Lucien Cook, director of Savills research, this reflects how different parts of the market have reacted differently to key market drivers.

‘Buyers looking for safe haven investments have underpinned demand. But there has been a general lack of urgency among other buyers because of uncertainty over both the global economic outlook and the effect of the stamp duty and associated tax changes introduced in the budget,’ he explained.

But in the higher price bands the effect of this increased tax burden has had less of an effect. There were more than 100 sales of £5 million plus residential properties in the three months to the end of June 2012, the total value of which exceeded £1billion in a quarter, for only the fourth time in the past five years.

‘Sales of new build property tailored towards the needs of high net worth overseas buyers have been particularly strong. In the last quarter, they accounted for 15% of these £5 million plus sales. International demand is less of a market driver in other prime locations and this has resulted in a slower, but less volatile recovery to date,’ added Cook.

Similarly, in the prime markets of North London, prices rose by 1.6% in the quarter but show growth of just 3.9% year on year. Cook added that there has been little evidence of bonus money in either of these markets since the credit crunch.Price growth in prime South West London exceeded that of central London in the second quarter but it slowed to 0.9%. Cook said that was in response to the general uncertainty in the UK economy and specifically the banking industry due to ‘the extent to which demand is driven by domestic family buyers employed in the business and financial services sector’.

‘Price growth has been driven by the injection of housing equity from central London, as buyers move along London’s wealth corridors and existing equity that has been recycled as families have been reluctant to move into the commuter zone,’ explained Cook.

‘Though there has been less use of the offshore ownership structures that were specifically targeted in the last budget in this market, the increase in the general rate of stamp duty has created a price threshold around £2million in these markets,’ he added.

Global Real Estate Investors More Bullish About Asia's Prospects in 2013 Over U.S. or European Markets

According to new research paper by Ferguson Partners Ltd., a global executive recruitment consultancy, in partnership with the Asia Pacific Real Estate Association (APREA), reveals more bullish attitudes about Asia's real estate prospects for late 2012 and 2013, compared to the slowly recuperating U.S. and lagging European markets.

The findings are based on the feedback from one-on-one interviews with regional industry leaders and global investors, who provided their insights regarding expected capital flows into Asia and their outlooks for regional market performance.

After a recent hiatus, U.S. and European capital sources appear ready to restart investments into select cities and property sectors, including Japan, China, Singapore, Australia and Indonesia. However, that capital flow is still well below the high-octane pace prior to the 2008 global credit meltdown.

According to the research, the outlook for China will dictate real estate investment appetites in all neighboring countries.  With a 7.5% increase in gross domestic product forecasted for 2012, China's growth and economic expansion is capturing the attention of return-starved institutional investors, who have been bogged down by lackluster U.S. and European markets.

"Right now, China is dictating the appetite for investments in the entire Asia-Pacific region," said Peter Rackowe, Senior Managing Director of Asia for Ferguson Partners Ltd. "Despite the great interest in China, the real estate leaders in that region are exercising caution and restraint, as they harbor doubts about how long China's leaders can keep the current pace of growth and when the current growth will begin to normalize."

Other trends and findings:

• Interest rekindles in Japan - In comparison to China, Japan appears to be a defensive, safe and income-oriented bet. The outlook has brightened for Tokyo, although deal making and liquidity available for transactions remain a challenge.  However, the Tokyo market should benefit from capital infusions in the aftermath of last year's earthquake and a more robust J-REIT market, which can access the market in ways not possible in China or India and offers the potential for good cash flows. Constrained supplies of retail and logistics space favor these sectors over office, which has higher vacancies and more suspect demand fundamentals. With stores taking more space, the retail leasing market is brightening, especially for urban shopping districts.  Outside of Tokyo, investors are showing little interest elsewhere in Japan.

• Other market opportunities - Despite excellent demographic profiles, India and Indonesia continue to suffer from investor concerns over corruption and lack of market transparency.  With greater transparency and more rliable legal systems in place, respondents believe that Australia and Singapore will have solid investment prospects with less risk than China.  However, offshore investors may continue to have trouble finding deals in these markets.  Aside from well-placed local players, respondents do not believe that other regional markets will justify the investment risk at this time.

• Capital flow dependent on partners - Regional players, who are more comfortable with local relationships, will more likely do "one-off deals". On the other hand, offshore investors have learned finding reliable, well-positioned fund managers and local partners will determine success more than market fundamentals.  Chinese players prefer to align interests for the long-term, seeking strategic value in expanding their businesses and personnel.

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New Hotel Investment Launched Offering 14.52% Yields

London-based investment company, Experience International has launched a new, fully-operational hotel room investment in York. There is 50% non-status finance available in low entry level & operational UK hotel room investment providing investors with 14.52% yields.

Knight Frank’s 2011 UK Hotel Sector Review has shown that across the UK, occupancy rates, average room rates and revenue per available room (RevPAR) were all up on the previous year. Performing better than initial forecasts, hotel investments are once again an attractive option for those looking to expand their investment portfolio.

There is no question that London is the UK’s strongest performing market however, for those looking to for a lower entry level investment will strong returns; a number of regions are performing well.

Situated in the North East of England, York is a popular leisure and business destination which, in 2010, saw annual tourism spend reach £442.6 million with annual visitor numbers surpassing 7.1 million – according to figures from VisitYork.org.

Of the total, £239.7 million was spent by leisure visitors and £202.9 million was spent by business tourism.

A strong location for those searching for a hotel room investment, a leading provider of market data to the hotel industry, STR Global, revealed that in 2011 after Heathrow Airport (82.7%), York achieved the highest occupancy rates in England (80.1%).

What’s more, York has shown a continual rise in occupancy levels, with 78.8% recorded in 2010 and 77.8% in 2009 – according to data released in the York Hotel Occupancy Survey 2010.
London-based investment company, Experience International has launched a new, fully-operational hotel room investment in York.

Managed by the second largest hotel group in Europe, investors can enter the investment from just £25,000 if purchasing through the 50% non-status finance option.

“We’re pleased to offer our members a new, low entry level UK hotel room investment which achieves 14.52% average returns,” Steven Worboys, MD of Experience International commented.

“This is a rare opportunity for investors to secure an immediate income from a hotel which is fully operational and located in an area where there is a high demand for rooms.”

Unlike other hotel room investments, investors will receive income from both room revenue and from all areas of guest spend attributed to the room.

The hotel features 94 en-suite rooms, 8 full equipped conference rooms, a 300 capacity reception room, plus a licensed bar and restaurant and a private dining room. The hotel is one of North Yorkshire’s premier conference venues and offers wedding and events packages.

For more information about this high yielding, UK hotel investment, contact Experience International on 0207 321 5858 or email enquiries(at)experience-international(dot)co(dot)uk.

Buyers Seeking Out Smaller Properties In Dubai, Latest Data Shows

The number of real estate transactions in the first six months of 2012 in Dubai increased by 24.5% year on year to 12,521, according to the latest figures from the Dubai Land Department.

But the average size of properties bought in Dubai shrank by nearly half and average sales prices were down by 23%.

The average size of properties purchased shrank from 533 square meters in the first half of 2011 to 294 square meters this year, a drop of 44.8% and average sales prices fell from AED2.82 million to AED2.14 million.

‘I believe that this is due to buyers investing in smaller units, so the asking prices are going to be obviously smaller. We are seeing evidence of this in the level of enquiries going up for one to two bedrooms as opposed to three to four bedrooms,’ said Mario Volpi, head of sales and leasing for UAE residential at Cluttons real estate agency.

‘This region has always been cash rich, so I do see a large growth in the future in terms of activity as more and more banks produce attractive deals to entice buyers to take out mortgages,’ Volpi said.Data also showed that the number of mortgage transactions fell by 23% to 2,903 during the same period, showing over three quarters of buyers are shunning lenders and opting to buy with cash.

According to Matthew Green, head of research and consultancy at CBRE, the residential transaction market is likely to maintain its positive footing during the course of the year.

‘However, transaction volumes are expected to be more constrained as compared to the first two quarters, due to the slower pace of the summer and festive period of Ramadan wherein historically the markets remain more subdued,’ he added.

Greedy Home Owners Left With Empty rentals day before London 2012 Olympics opening ceremony

London home owners renting out their property for the Olympics have generally been successful but the expected hike in rentals has not been borne out, according to lettings agents.

The day before the opening ceremony for the 2012 Games those asking too much have found their properties empty with experts saying that accepting a good offer is better than being left with nothing.

Although here has been an increase in demand for short term rentals in the Stratford area around the Olympic Park, excessive rental returns have not materialised, according to Zain Mahal of Belvoir Stratford which operates in the heart of where the Olympics will be held.

‘Due to the influx of a high number of tourists from both the UK and abroad, plus the athletes and companies participating in The Games, the demand for rental property in our area has increased. There is a high demand for properties near the Olympics’ Park and in and around Stratford to save commuting time and many landlords have looked for the best ways to capitalise on this,’ he explained.

‘However, although we have seen some rental price increases I have advised landlords to focus on keeping the prices realistic and not to demand too high a premium. While undoubtedly the London 2012 Games will help boost the economy and the rental income for some central London landlords, they still need to be realistic as accepting a good rental offer is better than being left with a vacant property,’ he added.

He also pointed out that although there is a huge demand for properties, there is also a wide supply of properties available. ‘Landlords must remember that they are competing directly with hotels and high quality properties,’ said Mahal.

While central London agents have reported some increased rental activity, agents on the outskirts of the city say that the impact of the Olympics has actually been fairly minimal.

‘I think the demand for properties around London is extremely high anyway so I’m not sure the Olympics have had that much impact. Some landlords have tried to increase rent for the Olympics period but, of course, there is only a defined amount of money out there and some of them have been unrealistic and failed to get any interest,’ said Carl Belle of Belvoir Ilford.

‘It’s important for landlords to be sensible and not get on the hype bandwagon of trying to achieve crazy levels of rent, especially if the property is nowhere near Stratford,’ he added.

Jon McNeice of Belvoir Brentwood said that some landlords on the outskirts of London have unrealistic expectations of what rents can be achieved during the Olympics, with some landlords asking tenants for more than £20,000 a month.

‘In all honesty there hasn’t been a massive surge in demand for rental properties in our area. We had enquiries last December from the Olympics organisers looking for accommodation for staff, but we haven’t seen an increase in tourists looking for short term lets. We’ve got a large hotel opposite our office and we asked them to contact us if they got fully booked or there was an overflow of guests, but even they aren’t fully booked at this stage,’ he added.

‘Some landlords have been asking for huge sums of money to rent their properties. One couple were asking for £9,000 a week and, although they were very confident this was achievable, their property is still sat there unoccupied,’ he explained.

For many landlords and agents, it’s just business as usual. ‘I’d love to say that the Olympics have made a big difference for our landlords but it hasn’t,’ said Craig Walker of Belvoir Camberley.

‘Like many other offices on the outskirts of London, at Belvoir Camberley it is just business as usual,’ he added.

Gumtree.com revealed that it has seen a 62% increase in adverts posted by Londoners looking to cash in on their homes and spare rooms in prime Olympic hotspots. It has found that the average asking price for London short term rentals has actually dropped by 24% between May and June 2012, as home owners become more realistic in their price expectations and the Games draw closer.

Top New Buy-To-Let Mortgages Launched

Good news for landlords, as flurry of buy-to-let mortgages enter the market. But how do they compare?

An outbreak of new mortgages and revised deals have hit the buy-to-let market over the last few weeks, which could be great news for landlords and those thinking about investing in property to earn an income.

Let's take a look at what's been happening.

Coventry goes large
Coventry Building Society has launched a massive six new products for the buy-to-let market. These include four five-year fixed rates (two of which boast no early repayment charges) and two lifetime trackers. All deals are available on a maximum loan-to-value of 75%.


Let's start with the five-year fixed deals. You have the choice of paying a £1,749 fee for access to the best rate of 5.60% or paying a reduced £999 charge which results in a beefier 5.80% price. Fixing for this long can offer peace of mind, but these two deals come with early repayment charges so if you want to switch or sell-up you face a hefty penalty of 3% of the balance up to the end of October 2017, when the deal ends.

Early repayment charges (ERCs) can be a nightmare if you decide to sell your property investment or want to remortgage before the end of your current deal. For savvy investors who want to avoid this pitfall, the two other special 'flexx' five-year fixed rate deals that come with no ERCs could be a better option. The cheaper of the two at 5.75% comes with a hefty £1,749 fee, but for a more appealing £999 you will have to suffer a 5.99% rate instead.

If a five-year fix doesn't appeal then there is a 5.49% (tracking base rate plus 4.99%) lifetime tracker for a fee of £1,749 or one at 5.79% (tracking base rate plus 5.29%) for a smaller fee of £999. Neither of these deals come with ERCs, so if rates rise you can get out penalty free.

The six new deals certainly paint an impressive range but how do they compare?

Well, other similar deals seem to be cheaper.

Skipton Building Society offers a similar five-year fixed with a rate of 5.39% (which is 0.21% cheaper) for a fee of £1,495 and Leeds Building Society has a fee assisted five-year fixed rate at 5.49% (0.11% cheaper) on a 70% LTV. However, both of these alternatives have ERCs, so investors would need to think carefully before signing up.

In terms of lifetime trackers the Coventry deals also appear to be quite expensive compared to others. HSBC has a similar deal that costs just 4.79% (tracking base rate plus 4.29%) for a fee of £499 on a LTV of 75%.That's a massive 0.7% difference and a fee that is over £1,200 cheaper.

Clearly a big range doesn't always mean the best rates so make sure you seek some help on tracking down the right deal through one of our mortgage advisors.

Skipton cuts and extends
In June, Skipton Building Society cut the rates on its buy to let deals by 0.10% and introduced more fixed options.

Now the building society has brought out a double helping of two-year tracker deals to further bolster its range.

The cheaper of the two is 4.34% (tracking base rate plus 3.84%), which you can get if you have a 30% deposit and the other more expensive option of 4.59% (tracking base rate plus 4.09%) is for those with a smaller deposit of 25%.

Both trackers come with fees of £995, which is pretty reasonable considering the average has passed the £1,500 mark - see average mortgage fee passes £1,500 for more. They also have ERCs of 1% of the amount borrowed.

These new deals are competitive when you look at some of the two-year deals out there at the moment. Lloyds TSB and Halifax both have similar two-year trackers but for a rate of 5.19% on a LTV of 75%, which is 0.6% more expensive.

New kid on the block
For those on the hunt for more choice in a narrowing playing field (there are only 411 buy to let products available today compared to 2,265 five years ago according to Moneyfacts), White Knights Finance could be a breath of fresh air on the buy-to-let market.

This new UK property investment lender promises to roll out innovative buy-to-let deals like 90% loan-to-value offers on selected residential properties, 60% LTV offers on commercial property purchases and 85% LTV on freehold ground rent investments. The details of the rates have not yet been disclosed but with a 90% LTV offer this could be an exciting new avenue for investors with a small deposit.

Even more attractive is the simple four stage loan process the company uses to deliver buy-to-let property finance within a short period time. According to the firm this could happen as quickly as within five days. We'll have to wait and see if it lives up to its promises.

Get advice

High tenant demand coupled with falling house prices in some areas makes a buy-to-let investment sound promising. But this sort of venture is not something to be taken lightly. While there are profits to be made from rental payments and eventually (fingers crossed) the sale of the property, there are also the associated pitfalls of ending up with an empty property with no rent coming in or your property losing value.

Check out how to rent out your home and our guide on how to become a buy-to-let landlord.

For more advice talk to one of our mortgage advisors for some help choosing the right buy-to-let deal for you.

Top buy-to-let mortgages

Here's a round up of some of the best deals on the market, new and old, organised by cheapest first.

Lender	Deal	Rate	Fee	Max LTV
The Mortgage Works	One-year tracker	3.29% (tracks base rate + 2.79%)	3.50%	75%
HSBC	Lifetime tracker	3.79% (tracks base rate + 3.29%)	£1,499	65%
Woolwich	Lifetime tracker	3.89% (tracks base rate + 3.39%)	£1,999	60%
BM Solutions	One-year tracker	4.05% (tracks base rate + 3.55%)	1.50%	60%
Halifax	Two-year tracker	4.49% (tracks base rate + 3.99%)	£995	60%
Skipton Building Society	Three-year fixed	4.69%	£995	70%
Northern Rock	Three-year fixed	4.89%	£995	60%
Ipswich Building Society	Two-year discount	4.99%	£1,400	75%
The Mortgage Works	Five-year fixed	4.99%	3.50%	50%
HSBC	Two-year fixed	5.29%	£499	75%
Skipton Building Society	Five-year fixed	5.39%	£1,495	75%
Leeds Building Society	Five-year fixed	5.49%	£398	70%
Coventry Building Society	Lifetime tracker	5.79% (tracks base rate + 5.29%)	£999	75%
Coventry Building Society	Five-year fixed	5.80%	£999	75%
Leeds Building Society	Three-year fixed	5.99%	£1,498	80%