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INVESTMENT STRATEGY |
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We believe that the way to measure returns from investing in property is to look at Return on Equity. Our investment approach is to maximise Return on Equity. The three key components in this strategy are:
To increase the return on equity it is best to have a mixture of depth and equity financing any single property. Put simply, if a client has £250,000 to invest (equity) the returns on this equity from borrowing another £250,000 and buying two properties will be greater than the return from buying one property. The rental income from a property must cover all expenses including interest costs, management charges, allowances for void periods and ongoing maintenance. The higher the initial yield the more comfortably a property can be geared. A low yielding property will allow less depth to be serviced, which means more equity will be needed, which means that the return on equity is likely to be lower. The smaller the amount of equity invested in a property, the greater the return will be if the property increases in value. For example, if a £250,000 property increases in value by 5% the return on equity assuming no borrowing will be 5%. If 50% of the property was financed with depth the same increase in value of the property will lead to a 10% return on equity. Our investment approach is to optimise the relationship between borrowing, yield and capital growth for each individual investor, taking into account their specific circumstances. We find properties with good initial yields, in areas that are likely to enjoy above average increases in value. Such properties can comfortably support borrowing of between 65% and 75% of the value. Ultimately the decision on how much to gear is left to our clients. Our theory is that a well designed and thought out strategy to build a diversified portfolio of both property type and geographical area has the potential to achieve sustainable and attractive results, whereas an ill judged investment in the wrong area will increasingly have the potential to lead to poor or even negative returns in an environment of lower overall growth. |