Sunday Business Post Expo Dublin and Germany

The Expo in Dublin was very enjoyable and an opportunity to meet old and new friends alike. The majority of exhibitors were selling Germany and its major cities and these stands where particularly busy. I have been looking at Germany for some time. Property prices are genuinely cheap when measured against value factors such as rents and wages and comparables with other European cities.

The strong positive cashflow is important as you can take a solid 10, 20, 30 year view and make good income profits with none of your own money in the deal if you know what you are doing.

Clearly the Irish do!

In the latest edition of Jet-to-Let Magazine we will look at Germany and in particular Berlin in some detail.

Postbag

We've come back to a rather large post bag which more or less follows on from the issue of negative cashflow investing and affordability that we have looked at over the past couple of weeks. Clearly an issue which many people are wrestling with both theoretically and in practice. Unfortunately, I do not have time to reply to individual issues, the merits of various property deals, etc but I hope that the magazine and newsletter will provide a balance to other publications you read and also just as importantly allow you to make an informed decision based on different opinions which is healthy.

There's no right or wrong opinion – just opinion.

To read the previous newsletter where I set out my views on why negative cashflow investing is not a good idea for first-time buyers/novice investors, please click here:

http://www.jet-to-let-magazine.com/newsletters/sample.html

Affordability is determined by salary multiples - use common sense

Most of us have an abundance of common sense – so use it.

How affordable is a Porsche 911 to a person on the minimum wage, irrespective of taxes, affordability of loans and the willingness to take on debt?

How affordable is a £100,000 property to someone who earns £50,000 per annum?

How affordable is a £100,000 property to someone who earns £10,000 per annum?

Other factors are important, but the key factor is the relationship between (real) earnings and property prices.

I'll leave it there as I know most of us understand it.

Liverpool and Leeds 

I read a well put together newsletter today written by a person who is a self-made property millionaire. I know some readers of this magazine also receive it and many of you know her, as I do. She speaks a lot of sense based on years of investing experience and wealth building.

In her newsletter, she warns against negative cashflow investing and uses new build property in Leeds and Liverpool as examples. In Leeds, presently 20% of new build properties are unoccupied and in Liverpool there are 2,284 new builds under construction and 2,658 with planning permission.

And I can tell you that income multiples in Liverpool are not sustaining the high end new build property which is being built – supply exceeds demand as there are only so many professionals who have the salary multiples to either buy or rent. These properties are being bought by investors, many of whom have been sold the “subsidise the costs, because capital growth is the play” argument.

She continues by stating that you must treat property investing as any other business and cashflow is king.

Sound advice.

Poland

The latest report from the Royal Institution of Chartered Surveyors makes interesting reading in a country where property prices are increasing significantly:

“The vast majority of Poles cannot afford new housing even with new availability of competitively priced mortgages and support for down payments from parents. Potential homeowner and renter demand is likely to take many years to satisfy . ”

Royal Institution of Chartered Surveyors (RICS), European Housing review 2007.

This is a very sobering comment from RICS which is in-line exactly with my thoughts.

Re-sale and rental growth

It takes a very long time for indigenous real wealth to increase sufficiently in order to support some of these emerging real estate markets in terms of re-sale and rental income growth.

Some developments are priced entirely with the overseas investor market in mind. How many Bulgarians could afford an apartment on Sunny Beach , for instance? Not many looking at the number of re-sale properties on the market and the lack of solid rental returns. I predicted this in the Sunday Times a couple of years ago and now we are seeing the reality.

A portfolio investor has the benefit of supporting operating losses with other properties which are making a profit. Novices do not and the “many years” element of the comment from RICS leaves this type of investor with a high level of risk, particularly if buying multiple units.

House Prices to Earning Ratios

In the UK, we have the Halifax , Nationwide, Hometrack, the Financial Times and others who calculate House Prices to Earnings multiples or ratios. It provides a benchmark and allows historical comparisons to be made.

Common sense, not just economics, tells us this is that the larger the difference between (real) salaries and house prices, then the less affordable they become and more susceptible to a fall should economic or political circumstances change.

Dominic Farrell