Monday, February 06, 2006

Investors warned to avoid property

FT.com / World / UK - Investors warned to avoid property
By Jim Pickard,Property Correspondent
Published: February 4 2006

"Investors should steer clear of buying UK properties for the next few years, the head of real estate at HSBC Private Bank has warned.

Willie Gething, managing director of property at the organisation, said the market - with the exception of London - looked like a bad bet, in terms of net yields and likely price increases.

HSBC Private Bank is one of the three biggest private client advisers, vying with the likes of Coutts and Citigroup to offer investment advice to the well-heeled. It has more than 4,500 clients in Britain.

The group has started advising clients against investment in property, both residential and commercial, in most of the UK. Instead, said Mr Gething, they should be allocating their money to international indirect property funds, which offer higher returns and a wider spread of risk.

There were perfectly valid personal reasons for buying a UK property, such as emotional attachment or finding somewhere to live, said Charles Ellingworth, the group's marketing director. "But for pure investors it is now very hard to justify at current yields," he said.

Net yields - the annual rental return on a building - are in some parts of the country as low as 3 per cent, lower than the cost of borrowing.

Thousands of investors are, nevertheless, still taking on big debts to build up large property portfolios. "People in Britain are still out there buying their flats on 98 per cent leverage, which is fine in the current interest rate environment, but if interest rates move up their investment becomes negative," said Mr Gething. "These buy-to-let investors are still fighting last year's war."

The group predicted house prices, excluding London, would be no higher in five years time. However, prices in central London, were due for a recovery after treading water for the past few years.

As for commercial property, Mr Gething predicted that prices would continue to rise this year because of the "weight of money" trying to get into the market. Yet this was not sustainable in the long-term."

A reasonable view. Anyone buying now and expecting to be rewarded with capital gains on their property portfolio is very likely to be disappointed. However there is another view that can be taken by the long term investor. By gradually accumulating a portfolio over the next four or five years, and taking advantage of the buyers' market, an investor is likely to be buying at a low point in the market leaving the door open for capital gains beyond five years.

Chris Bell

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