Investment in Edinburgh
How has the business of residential property investment changed and what can we look forward to over the next few years? A good example is our Brown St development which comprises 32 three bedroom student flats. A site being sold by the Council for housing development, this was an opportunity identified by Cullen property in 1997. We sourced individual investor clients, one of whom was brought in to carry out the development, for single flats. Our target was to provide student accommodation in as economic way as possible. This we achieved by designing a three bed layout flat with a living/kitchen and two wet rooms in less than 700 sq ft.• The flats were bought by investor clients at prices around £72,000 to £75,000 with typical cash deposits of around £40,000. Rents were £750pcm
• Today that same flat is worth around £180,000 and is let at £1020pcm. This equates to a 36% growth in rents since 1999, 150% growth in capital value and a return on cash invested of 250%
• We bought traditional stone tenement properties for clients at the time and figures for those perform in a similar way
• Even allowing for the recent decline in capital values, these flats have shown considerable growth over a long period and we believe that good quality Edinburgh property will continue to show good returns for those prepared to hold for the longer term
Mortgages
Brown Street mortgages were all at 75% LTV at an initial rate of 7.9%. Arrangement fees were about £600. Today, with base rate at 0.5%, we can be deluded into thinking money is cheap but the reality for most - and indeed for all new investors - is that money at this time is quite expensive, particularly when arrangement fees and other costs are taken into account. For political and economic reasons it is likely that base rate will remain relatively low for some time which is good news for those whose loans are linked to it.
Sales market
Sales in Edinburgh have generally held up very well and, in the sector of traditional stone built Georgian, Victorian and Edwardian properties, sale values are now coming closer to those in 2007. There have been larger corrections in the rest of the market as
values moved down towards the first time buyer or secondary markets where purchasers are less able to pay 25% to 30% cash deposit. This end of the market will take longer to recover as levels of unemployment remain a threat.
There are many sources of information for the different markets in which we deal. We continually consult Bank of England minutes of the MPC meetings, ESPC market figures, Halifax, and other lenders’ data and so on. Many of these produce differing facts which we then analyse and assess their impact on any particular sector of our market.
Students/universities In spite of funding changes for tertiary education we are still a world renowned city for our universities. This issue is much in the press at the moment as funding for home grown students gets tougher and universities compete for the spending power of wealthy foreign students.
This latter market place is a big part of Cullen’s customer base - over 140 flats with over 500 students as tenants. For our investor clients a student let flat is still the one most likely to achieve the figures described above. The starting price has gone up and yields have dropped but a well priced property let to the student market will still be a good long term investment.
Rents
When we started in the late 1990s rents were in the region of £225 per calendar month per room - they are now an average of £350pcm and, in the New Town, can be in excess of £450pcm.
HMO
One of the main changes in the student market has been the introduction of the Houses in Multiple Occupation licence in 2000 onwards. This covers flats with three or more unrelated tenants and needs renewal every year. The Government led regulations carried out by the City Council mean there are ever more stringent works to do to such properties. The latest twist is to implement a requirement for Fire Risk Assessments for all properties and those which comprise double upper flats to install a mist fire drenching system.
Cullen used to contract out the renewal of licensing; as of 1st Feb we have brought this in-house so we can have a better control on costs of fire control and smoke alarm certification and maintenance and the processes of renewal generally. The cost of this
will still be £150+VAT as currently but it will give the benefit to the clients of a more cost effective procedure.
Predictions for 2010• We will end the year with bank borrowing rates slightly but not significantly higher than where they are at the moment
• Whilst capital values may not rise much as we move further from the pain of 2008/2009 confidence will hopefully return to create a more reliable market place for buyers and sellers to move in
• Edinburgh compared with many other parts of Scotland is looked upon as a safe haven for investment in bricks and mortar. A recent study by the Office for National Statistics indicates population growth in Scotland towards 5.5m over the next 20 years with a good proportion of that in East Lothian feeding the Edinburgh employment market
• Student rents will rise slightly in 2010 and probably see a more usual increase of 3 or 4% next year following a rationalisation of licensing and student intakes
• Renting a home will remain the only option for many young people sadly unable to fund the first rung of the purchase ladder. Rents may not rise hugely in the professional sector but well presented properties will always let quickly at a market rent
• A very close eye will need to be kept on your mortgage costs in the future and in an uncertain world there may be merit in seeking a fixed rate for longer periods….if you can find them
Recent experience shows us that there is still the appetite to have part of one’s private wealth in bricks and mortar, and well purchased and managed properties in Edinburgh will serve you well over the long term. Cullen regularly achieves occupancy rates of over 99% for all our properties and in the student market even closer to the 100% mark.
Malcolm Warrack, MD Cullen Property
