Copyright: David Lawson - Docklands Guide 1996
The idea of becoming a landlord never crosses the mind of most people. At first sight it seems complex, and still carries a sort of Dickensian flavour tainted by the residue of Rachmanism. Yet more and more ordinary people are shaking off these archaic prejudices. If you can by a home for yourself, another one - or more - is no more difficult. It can also be lucrative.Londonís Docklands attracts these converts like bees to a honeypot, as it is a natural target for high-quality tenants working in the nearby City or at Canary Wharf. Overseas investors saw this potential years ago, and millions of pounds have poured in from Hong Kong businessmen and Middle-East expatriates. Now ordinary UK buyers are taking the plunge.
One reason is that the figures stack up. The rent return (yield) on a typical flat averages between 9% and 15% a year compared with less than half that amount on bank/building society savings. Economists also say those accounts will continue to underperform as interest rates remain low for the next decade.
The good news is that makes borrowing cheaper. Until now, mortgages to buy an investment have been far more expensive than normal loans. Lenders like the Halifax and Woolwich are keen to support the resurgence of renting in the UK, however, and are offering rates almost on a par with those for owners.
But what about the task of finding the right property and tenants? And how do you cope with the problems of raising rents - or even getting property back if occupiers refuse to leave?
All these problems conspired to reduce renting from more than 90% of UK property before the First War to less than 10% by the Eighties. The law has radically changed since then, however, swinging the balance back in favour of landlords. Estate agents have also revived old skills involving finding and managing property.
Perhaps most important, people are keen to rent rather than buy, so there is a ready market. Even if house prices soar again and they rush off to buy - a highly unlikely scenario - investors are cushioned by the fact that their property will benefit from this boom.
HOW TO DO IT
Some people try a DIY approach, buying up a likely property, advertising vacancies in the London Evening Standard and dropping in every month or two to make sure the place has not been burned down. That is a gamble best left to experienced buyers.Renting can be a legal minefield, according to Juliet Hoeg, Docklands lettings manager for Cluttons. 'Did you know, for instance, that all furniture has to meet new fire regulations?' A snap inspection could leave a landlord facing a £5,000 fine for the sake of some old armchair in a spare room.
And how do you choose the best thing to buy? 'It is not like choosing your own home,' says her colleague Tom Marshall. 'You might not like the place, but it could be perfect for a tenant. You might want to make substantial changes to suite your taste, but that could add enough to the cost to make it a bad investment.'
The crucial point is choosing something which will draw in a constant stream of tenants at the best rents. Beginners almost always work out their sums by assuming a property will produce rent 52 weeks a year. But there is plenty of competition out there and it only takes a month or two empty to make the exercise look bleak.
Agents are not cheap, taking up to 10% of rents to find a tenant and around 15% if the service includes management. But the cost is usually worth it. They know who the tenants are, what they want and where they will pay to go. You can even spend an extra 1% commission to retain an agent to find a property. That way if it turns out to be a dog, you can sue for bad advice.
Don't expect uniform advice, however - or even uniform service. Like any other investment experts, they will vary in opinion about what are the best buys. Some also fall down on management, allowing tenants to sub-let or build up arrears. Using a firm which is part of a recognized organisation gives some protection including a code of practice and strict rules on banking rents. These include the Association of Residential Letting Agents, Royal Institution of Chartered Surveyors, the Incorporated Society of Valuers and Auctioneers and national Association of Estate Agents.
But there are always grey, if not black, sheep, as well as experts who have no letters after their names. Word of mouth is a good guide - particularly if it comes from other investors. But get them face-to-face rather than from selected quotes in a glossy brochure. This is a big investment, so you have a lot to lose.
One couple tried the DIY approach with a small house. They had no pensions and were looking for a safe investment. PEPS were too expensive and shares too risky. Property seemed ideal. 'We bought locally, so we knew what was letting and for what rents. We could also keep an eye on the place.'
After one failed court case to recover rent from a tenant, a moonlight flit by another and a series of callouts to fix little things like blocked toilets, they handed over the task to an agent. 'I'm no longer sure it will be a good investment,' said the man, who prefers to remain anonymous until he has sorted out squabbles with the taxman.
Finance and tax is another mind-wrenching maze that needs careful expert advice. Landlords can reap big benefits by structuring their finances correctly. In fact, they do better than owner-occupiers, as there is no MIRAS limit on interest relief and it can be set against the highest rate of tax. This may get even better, as there are suggestions about allowing rents to be set against losses in other businesses, as they are in some other countries.
Upkeep may also be deducted from income but acquisition and legal expenses are usually excluded. There are other allowances, however, if investors set up a company, use an off-shore base or put the property in a personal pension fund. But this should all be planned from the outset, which makes the choice of a property crucial.
The amount of time you wish to keep a property can be crucial. 'You should expect to make little in the first few years while the rent pays for the loan. Rising rents then produce a surplus,' says Lee Goldstone of Regalian, a leading Docklands developer.
Many experienced buyers are in for only a short time to take advantage of rising prices, however. 'That is one reason why we have to provide good advice,' says Chris Hawkins of Property Liaisons. 'We have to be able to sell for a good price within a few years.'
So do some groundwork then call in a specialist rather than vice versa. Prices are starting to drift upwards, so it may not be wise too long. But don't move too quickly. Dogs is not just the name of an area of Docklands, and being stuck with one could drive you barking.
We asked some leading Docklands agents and developers what kinds of property are suitable for new investors - and how to go about getting it.
'There are three musts,' says Peter Sloane of Knight Frank.
- stick to assured shorthold tenancies. These were designed to give new landlords confidence that they can control tenancies.
- get good references - work, bank and personal.
- have an independent inventory by a specialist firm at start and finish. It saves lots of squabbles.
Matthew Bonner at Alex Neil says referencing should also be done by specialists. 'They are not difficult for tenants to fake,' he says. 'In fact, the sign of a good agent is whether they take this sort of care in using an expert outsider for this task.'
Where and what to aim for produces less unanimity. Tom Marshall at Cluttons recommends newcomers restrict themselves to new property. 'Otherwise you are competing with owner-occupiers who drive up the price.' His lettings colleague Juliet Hoeg adds that company lets provide the best security, and these tend to focus on smart new apartments. As young professionals are mainly involved, that means anything from studios to two bedrooms.
The ideal is a river or dock view, if only to add to lettability. Essential are efficient kitchens and bathrooms. 'And remember that Americans look not for baths but power showers,' she says.
The best flats are near transport such as DLR stations, says Russell Taylor of Savills. Not everyone works in Canary Wharf; in fact many tenants come in from the West End because they can get so much more from their money in Docklands.
'But don't get too close to roads and railways,' he says. No-one wants to wake to the sound of traffic and trains roaring past.
Furnishing should be taken into account in working out returns. Lee Goldstone of developers Regalian says they provide a 'package deal' of £5,000 for a one-bed flat on their Atlantic Wharf and Premier Place developments. This kind of deal, which also involves advice on raising the money and appointing an agent, has been designed for overseas buyers. But there is no reason why UK investors cannot take it up.
Specifications are are also crucial, says Taylor. 'Take a look around at the finishes. They vary a lot and poor ones mean rents will not rise as much in future.' He recommends taking lower initial yields on better schemes rather than going for the cheapest deals.
Another developer, Howard Crocker of Metropolis, says his Canada Wharf converted warehouse in Rotherhithe Street was designed to the high standards owner-occupiers demand. 'This can be a bonus for investors,' he says.
Not every tenant demands new property, however. Nor are company lets the only source of demand. 'New flats are like new cars. You lose a big slice of the value straight away,' says Sloane. So it depends on whether you are going for income or capital growth - something every investor should decide before they even look at a property.
Chris Hawkins of Property Liaisons says a lot of companies are now putting staff into good quality resales like the Cascades and The Circle because of the value and services. And Bonner says a lot of individual lets are taking place in Surrey Quays. That contributes to the fact that he does more lets than ever he did when based in Wapping and the Isle of Dogs.
Consensus also breaks down on where to go for a good investment. Hawkins believes Shad Thames is overpriced and Surrey Quays has too many voids. Hoeg feels uncomfortable about recommending anything east of her stamping ground in Shad.
Certainly, yields are higher in areas like Surrey Quays, but that could be compensated by greater price rises - particularly when the Jubilee Line opens. Again, it depends on the relative importance of income, security and capital gains. You pays your money and you takes your choice.#
Some properties favoured by agents:
Wapping/Limehouse - yields around 9.5%
Quayside - prices from £95,000
Dundee Wharf - from £110,000
City Quay - from £155,000
Atlantic Wharf - from £95,000 - 9% yield
Quay 430 - from £90,000 - 13%
Riverside Mansions - from £72,000 - 13%
Boss House - from £120,000 - 9%
St Saviours Wharf - two-bed £160,000 - 9.75%
Isle of Dogs
Meridian Place - £80,000. Probable yields over 10%
Premier Place - from £72,000 - yields 9-10% (ready next year)
Kingsbridge Court - from £78,000 - 11.5%
Cascades - two-bed/bath £95,000 - 13.6%
Canada Wharf - from £72,500 - 9-12%
Sovereign View - one-bed £75,000 - 10-13%
Hythe Point - one-bed £76,000 - 12%
Acorn Walk - four-bed £92,500 - 14%
The Lakes - three-bed house £167,000 - 10%