Property recovery: Stratified and Pockmarked

I can’t believe I’m about to say it…. But today I’m writing about niche recoveries in the property market, not the ‘whole’ market but rather that of giving an example of where we are seeing opportunity from an investment perspective. It is lonely territory because I have been so totally bearish on property for so long that a hint of bullishness is uncomfortable for me at this stage!

Recovery isn’t a destination, its part of a larger cycle, for every boom there is a bust, and for that reason we have spoken in the past about what recovery ‘might look like’ rather than ‘when’ it will occur.

The hallmarks of what a residential property recovery might look like are, in our opinion: property price stability in a range that is closer to traditional multiples of the average wage of the prospective buyer, a return of some inflation, rent price stabilisation (ideally tracking inflation) with yields at or above 6 to 7% and supply/demand dynamics in balance.

We don’t have any of those things in the Irish market in 2009, we probably won’t have those things in 2010 either, in particular the issue of oversupply will take many years to play out but that doesn’t mean that there is zero recovery or opportunity the same as a stock market crash doesn’t mean that every stock on the market is a failure, in equities you pick shares, in property you pick locations (which is usually based on proximity to infrastructure or certain local services), property types, and filter out as much risk as possible via pricing.

Which brings us to my belief on recovery in the property market which will be defined by stratification and pockmarking, what I mean by that is: recovery will happen at certain strata in the market (specifically starting close the bottom end of the market in non-apartment 2nd hand properties) and will be geographically pockmarked in certain neighbourhoods. Today we will discuss some areas and share our thoughts with you on it from an investment perspective.

We have used figures from Propertyweek.ie (valuers database), MyHome, and Daft in order to attempt to show that in some areas and on some levels there are genuine buying opportunities with desirable yields.

We are based ‘kit out’ costs as c.5% of the purchase price and while there may be some deviation above or below that, we make the assumption to demonstrate the wider argument which is the recovery of the market in certain locations at specific price ranges when weighed against rental incomes, closing costs are 2% and stamp is not applicable as we are only looking at investment property below the threshold of €125,000.

The area of focus is Stoneybatter on the North side and the Cork St. area on the South side, they are roughly at mirror locations on opposite sides of the river, in close proximity to the city, adjacent to the Phoenix Park, the Luas, Heuston Station and with a plethora of shops, schools and standard city amenities nearby.

Ashford Place, Stoneybatter – asking price €120,000
Fingal Street, Dublin 8 – asking price €110,000

These properties are amongst the first to come to the market at these prices, and while they may not be representative of the standard prices in these neighbourhoods, they do show that there are properties with motivated sellers and that in the future you can reasonably expect more to come to market at a similar price point.

Both of these properties are below the minimum threshold for stamp, but also for obtaining a mortgage, so it will likely only appeal to a cash buyer, so we will compare the yield to cash deposits taking that as a risk free rate.

A search on Daft.ie in the same area shows rents ranging from €900 to €1,000 but most are advertising at €950 for a similar property, I have my doubts on the asking price on rentals so we’ll pear that down to the lower end at €900 and run some figures and take a middle ground purchase price of €115,000

Cost: €115,000 + €5,750 (5% kit out) + €2,300 (2% closing costs) = €123,050

Annual Rent: (assumed 11 months occupancy in 12) €9,900

Yield: 9,900/123,050 = 8%

Best cash deposit yield: Anglo fixed 1yr @ 3.8%  (regular saver accounts offer more but not on lump sums)

The property is yielding 211% more than the best cash deposit rate currently available.

There are other costs involved, for instance, letting agent fees (if you use a letting agent) and second home property tax, but the 8% yield demonstrates that cash used to purchase this property (in particular when the investment window is medium to long term) would easily outperform any deposit product currently available, it is also beating AAA corporate grade bonds as well as sovereign bonds (excluding the likes of Venezuela).

What this doesn’t mean is that we are seeing widespread ‘green shoots’ however, it does mean that there are sensible investment options in the property market with yields which justify the risk, and mantra of ‘property is dead’ is simply not true, it is just a demonstration of current crowd behaviour minus any specific analysis, and that in itself presents an opportunity as people sell on fear under market distressed conditions.

These opportunities should only be weighed up after careful consideration (I haven’t viewed either of these properties) and appraisal of not only the property but the surrounding amenities and infrastructure, but one thing is for sure, in certain pockets at certain price levels there are genuine opportunities in the market.

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