Capital Appreciation vs Yield

London property investors should have a clear idea of their investment goals.

Should we focus on investment property with strong yields or the likelihood of high capital appreciation in the short, medium or long term.

Yield refers to the rent as a proportion of price of the apartment for example:

Bankside apartment cost to buy: £800,000

Square feet: 1,100

Bankside apartment rent achieved per week: £780

Bankside apartment achieved per year: £40,050

Yield: 5.1%

Bankside is a great area for investment as in addition to a reasonable yield, it is within zone one, affordable, walking distance to the city, safe, well stocked with good bars and restaurants and is still up and coming. Further development is planned for this area and with each new development, prices continue to rise.

Contrast with Knightsbridge which is one of the most expensive areas of London in which to buy investment property. It is an established area which is extremely sought after and has seen annual double digit price growth in recent years. As a result, yields are low and buyers only purchase there for secure capital appreciation. Many of the residential apartments could be said to be AAA* investments.

Knightsbridge apartment cost to buy: £3.1m

Square feet: 1,250

Knightsbridge apartment rent achieved per week: £1,160

Knightsbridge apartment achieved per year: £60,320

Yield: 1%

However for those seeking capital appreciation, Knightsbridge may remain a good place to buy because it is extraordinarily sought after and is likely to experience similar levels of price inflation as Bankside but because the capital values are higher, so the returns will also be higher.

Some investors will not look at Bankside at present because of the social housing in the area however tenants are less concerned about the proximity of social housing than buyers which means that yields can be higher for properties very close to or opposite social housing and other blights.

For those seeking high yield investments in London, social housing is a good place to start. Period or modern buildings should be preferred and beware 60s blocks which may have concrete cancer. Few estate agents will know about concrete cancer and won’t mention it if they do unless they have had problems with people getting mortgages in the block before. Suffice to say that it is caused by high aluminium cement which loses its strength with age and may need substantial works to stabilise it as a result which means high service charges in the long term. However there is research to suggest that it can resolve itself if left alone.

The Knightsbridge example above shows that it is best to buy further from the centre to achieve better yields. Smaller units such as studios and one bedroom apartments tend to deliver better yields than 2 bedroom flats which tend to be best for capital appreciation and will hold their value better in a slump.

The best yields are generally achieved by buying houses and dividing them into studio flats, however a special licence is required for letting such buildings and at the time of writing it is more difficult to then turn the property back into a family house.

Short lets can also achieve good yields but these tend to be most successful in city centre locations and require substantial management. For investors interested in this type of investment we have a plethora of contacts who manage properties this way. For the investor it is hassle free and typically there are no fees to pay but you sign your furnished flat to the company for between 1 and 5 years for an agreed weekly rent and the serviced apartment company will clean it market it and do most of the maintenance for the period of the rental.

This is most successful where you buy in a block where such company is already operating or you buy 5 or 10 units or more in the same block. Alternatively there are one or two estate agents who will let it for you on a short let basis, however in some areas of London, notably the boroughs of Westminster and Kensington and Chelsea, it is necessary to apply for special permission to do so, although not everyone does.

For those in the super-prime category, there is a growing appetite for super-prime property and precious little supply on the open market and therefore property of this type and development projects and land can be a good medium to long term investment. Unique properties with stunning views or in prime central London, those which offer integral parking and are paparazzi proof are exceedingly lucrative. A home in Knightsbridge which boasts outside space to which there are no overlooking windows was built on land bought for £10m and was sold for £50m for example. There is a much smaller market for development projects of this type and so the market is fickle and properties may take several years to sell but they can be very lucrative projects for the patient investor.

We are fans of development projects in general and have contacts with reputable builders and project managers who can create perfection. Developments at all levels can be extremely lucrative although much of the profit is in the buying and canny developers will frequently find themselves priced out of the market by investment funds and owner occupiers. The trick is to find things off market so there is no competition or get in first with an offer before anyone else has any time to do any due diligence. We are masters at this but have very limited capacity for commercial developers.

If you are an individual investor and would like to know more please call us on +44 (0) 20 7923 7564 or contact us here.