On Your Marks, Get Set ... Invest

Buy-to-let is dead, or so the conventional wisdom goes, killed by a combination of falling prices and the drying up of the credit markets. Try telling that to Simon Gray.

After selling his portfolio of properties in Chelsea, west London, in spring last year (“more by luck than judgment”), Gray, 50, who runs a seafood-import business, has just bought not one but five new-build Barratt houses on the outskirts of Billingshurst, West Sussex. Although unwilling to reveal how much he has spent on the properties (two with three bedrooms and three two-bedders), Gray says he received a “substantial discount” on the properties, which were on sale for £299,955 and £226,995 per unit.

Gray plans to rent them out and is confident of achieving an annual return well in excess of 5% on his investment. His wife, Charlotte, 28, a former lettings agent, will be in charge of rentals — when she is not looking after Archibald, their 16-week-old baby, that is.

“The new-builds are attractive to tenants,” Gray says. “This particular location is also good: they are half an hour from Gatwick and Guildford, and convenient for London. They tick all the boxes.”

Nor is it merely heavily discounted new-builds that are being snapped up. In scenes reminiscent of the late 1990s and the beginning of this decade, auction rooms across the country are again filling with investors — whether amateur or professional — in search of heavily discounted repossessions or “development opportunities”.

“If you had to write a recipe for the right time to buy property, you would list all the conditions we have at present,” says Gary Murphy, partner and auctioneer at Allsop. “As Warren Buffett says, ‘You need to be greedy when others are fearful, and fearful when others are greedy.’ ”For Murphy, the trigger for investors who know their stuff to get back into the market has been the recent surge in yields — the amount of rental income a property brings in each year as a proportion of its price. For many properties bought at auction, this can be 7%-8% — and, in some cases, especially outside London, it can reach double figures.

Not only is this high compared with other assets, it means that, with interest rates low and falling, such properties can easily pay their way from the start — which has not been the case for several years.

“During the boom years, people used to talk about total return: that is, they would justify the high prices they were paying not just in terms of rental income, but in terms of how prices were going to rise in future,” says Murphy. “Not all factored in the possibility of falls.”

Now, those Johnny-come-lately investors’ flats and houses appear to account for a growing number of the properties being snapped up by those moving into the market. Research released last week by Managing Partners Limited, a fund manager, shows that the number of properties repossessed from landlords rose by 302% from March 2007 to June 2008.

While yields are good, nobody buying should expect immediate capital gains; prices look set to fall further before they rise again. There are also signs that, in central London at least, rents are falling. With unemployment set to rise, landlords would be well advised to set aside a reserve to cover voids or non-payment of rent.

The Sunday Times Sunday January 18 2009