There’s a huge challenge facing anybody who wants to talk about today’s economy without using certain phrases loaded with meaning — the first an infuriating portmanteau we’re sick to the back teeth of hearing; the second, which more by accident than design alliterates perfectly with the surname of a certain American president with suspect hair…
b) Trade Tariffs
How long before we have to dream up a euphemistic antidote just to protect ourselves from these encroaching earworms? A bit like the way actors refer to Macbeth as The Scottish Play? I’m all for it.
But, even if we manage that…look out for a third earworm on its way to a media outlet near you…
c) Inverse yield curve
Okay, so that one might not be bugging you yet, but if that recalcitrant IYC doesn’t raise its spine and go converse soon, it will start driving you nuts. It’s already trending online, and might possibly join the ranks of: ‘credit crunch’; ‘war on terror’; and ‘the axis of evil’. Remember those beauties?
For now, though, seeing as we are approaching the festive season and the weird politics of 2018 are almost at an end, let’s forget all about squirming nematodes. Let’s close our eyes for a second and pretend they never even existed. And let’s focus on all of the good things that have happened in the news, things that give investors a boost, like the optimistic headline I chanced upon the other day in the weekend Times…
WHY IT’S BOOM TIME FOR LANDLORD BORROWERS
Okay, so I had to read that one twice because seeing it through the prism of the last few years, it didn’t add up. Just when I thought landlords were really starting to feel the pinch, suddenly up pops a reason to be cheerful.
I can see them now,throwing the paper down, running to grab the bunting, popping the bubbly and raising a glass to toast the end of austerity in their sector. But really it stacks up to one thing: lenders are looking at a dwindling audience and they’re getting desperate. Why? Because their business models are dependent on what they do. Lenders lend and if they’re not lending, they’re losing.
So even if they have to resort to tear-jerkingly low rates, low is still better than zero. The thing is, now it’s not justthe landlords battling with the punitive tax measures brought in by successive chancellors, lenders are getting their taste of the fallout, too.
In pandering to the needs of the clamouring post-teen population with their widening eyes on the first rung of the property ladder, while isolating buy-to-let landlords within the political landscape, Messrs Osborne and Hammond have also stitched up mortgage lenders, forcing them to narrow their margins just to keep the till open.
The question is, will it work?
Undoubtedly, some landlords will take the bait. After all, cheap money is hard to resist, and it won’t get much cheaper than 1.14 percent. Did you spot the decimal point there? It’s not a misprint.
Now, just to put things in perspective, when I go out there hunting for hotel deals, some of our borrowing used to secure those deals is set around the 15% mark. And with very good reason—you can read about it in our new eBook How to Fund Deals. But there’s a marked difference between investing in a domestic property of £500k with a 40 percent deposit (the bank’s required benchmark), and a hotel of £2-3 million with multiple revenue streams to draw on.
And even though I know it’s not all about the percentages, but about the overall shape of the deal and the way it unfolds over time, I’m struggling to see how landlords, hampered as they are by the raft of heavy-handed tax measures, plan to make money in the near-term.
And that’s just it, they probably aren’t. They’re entering the market lured in by low rate bait and buying property with a ‘to have and to hold’ mentality. They are, as city traders say, ‘marrying a position’, probably when they shouldn’t. Still, who am I to argue. There are those who believe that possession is key to real estate success—something I agree with— and for all I know, they have a robust business model, and a limited company in place for their portfolio that insulates them from many of the government’s anti-landlord tax measures. So things might work out. But it’s high risk. And I say that after 25 years in the game. In their game (residential) and in my game (hotels).
And with that earworm portmanteau that begins with the letter B (see what I did there), threatening to pull the price of property down, it’s even higher risk. The city traders I mentioned might say: ‘Be careful what you marry!’
Without the certainty of a decent yield, in the absence of additional revenue streams to fall back on, and with the likelihood of low capital gains a new reality, buying any sort of residential property in a toppy market in the hope of making a good profit is madness—irrespective of how low mortgage rates get. In an increasingly desperate political, social, and economic climate it seems that lenders are acting…well…desperate. In short, it’s an oversell.
As for hotels, my confidence has never been greater. And I’ll give you my reasons: in the likely event of yet another pummeling of our already beleaguered exchange rate, what naturally follows is the likelihood of a boom in tourism. Remember when you used to go to Spain because it was cheap, and now you go to Turkey because it’s cheap. Same deal. The cheaper the UK gets to travel to, the more people come, whether you like it or not. And that’s great for the Hotel Business, it’s great for the wide ranges of revenue stream, and it’s great for hotel investors.
Getting ready for your 2019 investments? Get in touch with us at Shepherd Cox and find out how to add value to your portfolio with guaranteed yields, backed by 25 years’ property experience.
Until the next newsletter when we may (or may not) touch upon the dreaded yield curve, have a fabulous festive season and a Happy New Year!