Be particulary careful if you are buying offshore property

Be ready when the cycle turns but choose carefully

Perhaps the fact that the UK property market is in a slump is the very reason why one should start thinking about investing in this traditionally stable asset class. Buy low and sell high is the fundamental investing principle, and while the market may still be in for more correction, fundamentals point to the UK market reaching its bottom as early as September. This means that value is likely to be found in the near future, and now may be the time to start understanding value and looking for a reputable partner.

This is the advice of Mariana Tolken (pictured), MD of GAS Properties, who is concerned about the lack of transparency which some developers and agents are portraying on the value of properties in unstable times. As the specialist UK property partner of Sanlam Private Investments, GAS Properties was born out of a need for South Africans to diversify their investments offshore. The company is backed with a team of 15 qualified local and international experts and strategic partners, with offices in RSA, UK and Mauritius.

In assessing value, GAS Properties points out the following transparency pitfalls and gaps in due diligence; and also offers advice on what should be checked in the cash flow statements presented by property sellers.

Independent valuation certificate: Nobody should buy any property in another country without having it valued by a registered independent valuator. No matter how good the numbers look on paper, one should always run these past an independent source. GAS Properties makes use of independent valuators registered with the Royal Institute of Chartered Surveyors (RICS) for every property sold, and advises that if the valuation does not meet the purchase price, one should walk away from the property, or lower the offer accordingly.

Market-related interest rates: The interest rate will depend on the source of the loan, and can range between 6 and 7.5% for a cost-effective UK-based loan, with base being at 5.0%. The interest rate used in the financials presented by the seller will affect the cost of the property, so check that you are able to get a loan at a market related UK rate before putting down any deposit.

Transparency of annual hidden costs: Ask about the likes of maintenance, levies, security, gym memberships and the like. These hidden extras are often not included in the assessment of a property’s annual upkeep.

Price per square metre: This is a good measure of value in a particular area. While some apartments, particularly in new blocks may seem good value on the surface, the rooms tend to be very small and their values are best assessed on a square metre basis.

Percentage deposit required: The amount put down as an upfront deposit affects the monthly payment rate. Check that you can afford the upfront deposit, which on a UK property, in the current credit crunch is typically between 30 and 35 percent.

Legal fees: Check that cash flow statements include all agent commissions and legal costs.

Escalating payments: Often offshore properties are sold on small initial investments and big promises of profit. Be very wary of accepting payment terms which escalate with time.

Big block vs. small block: GAS Properties’ advice is to choose small developments over large ones. The problem with big developments is they tend towards an oversupply of stock. Take, for example, one of the many developments going up in Canary Warf or those near to the new Olympic sites. People are typically buying such properties to let, with very few owners living in the developments. This not only affects the quality of tenant, but can result in vacant properties as a result of oversupply, which further drives down rental income and quality of tenant.

Guaranteed rentals: While guaranteed rentals sound very appealing, these are often built into the purchase price of a property. When all the guarantee rentals expire at the same time, as is often the case in a big development related to a particular event such as the Olympics, this too can lead to an oversupply of stock in years to come, as well as a disappointing actual rental achieved after the expiry of the rental.

The upside of London property

“While one does have to be very careful when investing offshore, the benefits still outweigh the research required,” says Tolken. “Offshore property is one of the best ways to diversify your portfolio, and the long-term fundamentals of property in central London are very stable. This is why we focus only on London property as an offshore investment in our business model.

“London has surpassed New York as a preferred business centre worldwide, has the largest economy in the EU and the highest average income in Great Britain per household.

“Residential property in central London has delivered more than a 600% total return since 1970. This, according to UK National Statistics, is close to three times the performance of shares on the FTSE 100.”

Tolken points out that interest rates are also much lower than in the 80s and 90s making London homes very affordable compared with 20 years ago.

“There is an ever-growing population in London, and the long-term housing shortage will be further compounded by the recent credit crunch,” she says. “For example, of the 240 000 homes scheduled to be built in 2008, only 60 000 will be completing.”

So what should one be looking for in a London property?

According to Tolken, one should keep looking for value. “We believe this does not lie in large developments in saturated areas, but in smaller developments in unsaturated, established areas close to the city.

“Typically we invest in buildings with classical or Victorian features, which are close to but not on top of tube stations. A block can make a big difference in London, and we look for quiet and quaint streets, which are within easy waking distance of transport and other amenities.”

Should you be considering buying property in London, and are looking for an independent evaluation, GAS Properties can be contacted for a list of accredited valuators.

Alternatively GAS Properties can source a property for you based on your individual needs. GAS Properties has built its reputation on established long-term direct relationships with property developers, solicitors, banks and independent advisers, with more than 60-million pounds buy-to-let investments under management. GAS Properties sources stock directly from trusted developers with no middle man, and is integrally involved in the architectural planning and development of its properties. For more information visit www.gasproperties.co.za or call 021 975 0351.