Many, in fact most, people live life looking backwards. Often they come into property investment with this same perspective.
They say if only they had bought in 2009/10 it would have been fine but now things are overpriced and we’re in a bubble. The problem was in 2009 they were looking backwards too! A person like this will never be able to purchase in a hurry.
Then there are those who look for a discount at today’s value. Doesn't seem wrong, does it? They are ready to buy, but they want to see a deal, of course a discount is required as what is the point of purchasing unless there is one.
It actually depends on your aim. Do you wish to hold the property long term?
If so, then a discount in the present time doesn't necessarily mean it will give the best long term growth.
It does not fit the aim. All it means is that you have come in with some equity built in on day one, but says nothing about where the price will go in the future.
If you were to sell the property on in the short term or flip it, a discount off today’s value is of course vital.
You may get a good discount off today’s market value, but will that property be worth more in seven years’ time than a property which has been chosen better? Probably not.
When you are considering a long term investment the purchase should be based on the long term capital growth of the property and not the immediate gain you may be benefiting from.
This would involve factors such as, which floor the property is on, which side of the square, where does the sunlight come in from, is the property share of freehold, what are the service charges like, is the management firm really looking after the block, do the residents have regular committee meetings, what is the feel of the property etc.
A real life example is a property which was purchased in the city centre of Birmingham in 2002, in Centenary Plaza on Holliday Street. It was purchased with a so called 15% discount off the market value. Over a 14 year period this property has not risen in value, in fact it absorbs money on a yearly basis. Once the mortgage, service charges and rental fees have been deducted there is a deficit.
Here you have a day one discount but no capital growth over the medium/long term. In this situation the primary reason is driven by the location. It could be argued there was no discount in the first place. Even if you accept this as fact, there has been zero capital growth since due to the location, which is city centre but not exactly London.
At the time there was talk of the town being the second capital of the UK due to regeneration and so forth, however the bottom line is there has been no growth in property value - not for this property anyhow.
There is something to be said for the maturity of the London property market. It goes back to at least 500 years and has been rising since. It will evolve with the changes in the market which are currently taking place and carry on its rise.
Conversely we purchased a property, not a particularly good one, meaning it was ex-council, for £275k. The property was purchased in December 2009 and the current value of that property is £625k. The property was in Westbourne Grove, which at the time was seen as the poorer neighbour of Notting Hill.
This property has doubled in six and half years. This represents a growth rate of 13.4% per annum, or an average growth of £53,846 per annum.
This is the peculiarity of the property market. The amount a property goes up by can be more than the average salary a person earns. In other words it makes more economic sense to buy a property in London than to even work. This is the situation of London property driven up by a scarcity of supply.
The property was purchased at market value with nearly no discount. It was purchased with a few important assumptions in mind.
One was this is the lowest level you can enter into a property in this location, therefore the chances of it dropping were very slim. Second it was in the poorer neighbour area, this is where the focus needs to be, the richer sides are already selling at top value. Thirdly ex-council used to be seen as a bad word. As time went on it was anticipated this would change. Also there was very little discrimination from a lending perspective of whether the property was ex-council in W2 or in the North of England.
The property was selected for the reasons above, this has been demonstrated in the rise in value the property has seen in comparison to other properties.
If we compare this to another property which was purchased a few months later which was neither ex-council nor on the poor side of the borough, we can see that the growth rate was not as favourable.
This property was a third floor flat in 73 Talbot Road, London, W2. The property was purchased for £565,000 in Mar 2010, it was later sold for £1.013m in January 2016. This represents a growth rate of 10.5% per annum.
This is about 3% less per annum than our ex council investment which was chosen specifically for medium term growth. Over a five year period this equates to roughly 15%, in time it will be more.
This negates the need for buying purely on a day one discount when holding for the long term. Instead you are better off looking at firm reasons as to why the deal will rise into the future.
