Property Valuations: Are You Paying Too Much?

The financial crisis emanating from the collapse of Lehman Brothers has turned conventional wisdom upside down, with many theories about economic and financial management now dismissed as belonging to a bygone era. The world is considerably different 4 years on from the dark autumn days of plummeting stock markets and contagion which was the catalyst for our present economic woes.

Property investment has not been immune to the calamities of recent years. Why would it be? Property is very closely aligned to the economy and particularly to the availability of finance, whether credit or mortgages.

Bold Spirit spotted the opportunities in this sector and began dealing in distressed property back in 2008. Indeed, we bought Bold Spirit House, our office in the central business district of Liverpool, at the height of the Credit Crunch. This was one of the reasons we got such a great bargain: timing.

And the time is now ripe to secure bargains. Bold Spirit has been very successful purchasing properties with outstanding returns. In all cases, we have had buyers for the properties even before we’ve legally completed on them. The demand for high yielding, high quality, hands-off property investment is high, evidenced by the fact we have a waiting list for Bold Spirit-developed properties.

Some properties require renovation, which we do to a very high standard, whilst some have other issues which we remedy. But in all cases, the value of that property is determined by the income, not any theoretical concept of ‘market value.’

Market value is such a subjective concept. Properties in the same street, with different aspects, fittings or décor can have very different ‘market values’ but to a buy to let investor, it should be the income which determines the value, not the property.

If one property is selling for £100,000 and the other for £130,000, but both rent for the same price, all other things being equal, the value is in the cheaper property. Sometimes, regardless of the ‘forced value’ – or cost of renovation – of a property, the rent (and the resale value, for that matter) hits a ceiling, particularly with social housing.

Unless you are buying in London and areas in the commuter belt or a listed property which has a scarcity value then, in my opinion, if you are not achieving a minimum 9% yield then you are overpaying for the property. It doesn’t matter how many percentage points it is ‘below market value’ the reality is, at yields of less than 9%, it’s still overvalued!

If you wish to comment on this newsletter, or read and comment on other property and economics related articles not published here, then see my blog at www.dominicfarrell.com

Best wishes

Dominic Farrell