THE GENERATION GAME

Property




CATHY HAWKER ASKS THE PROPERTY EXPERTS TO OUTLINE THE QUESTIONS AND ISSUES FOR PARENTS HOPING TO HELP THEIR CHILDREN GAIN A FOOTHOLD IN TODAY’S TESTING HOUSING MARKET

“Happiness,” said the American comedian George Burns, “is having a large, loving, close-knit family in another city.” The irony of that quote is not lost on today’s millennials, many of whom have had to reluctantly boomerang back to the family home after leaving university. With the average London property price having broken the £500,000 marker, more than 14 times average earnings, how can parents and grandparents provide the most effective helping hand to younger generations eager to get on the housing ladder?

Lindsay Cuthill, Head of Savills Country Department, highlights the problem. “Even wealthy buyers are being priced out of prime central London, where £750,000 doesn’t stretch far,” he says. “Then consider that a £600,000 property with a 25 per cent deposit probably requires a six figure salary to service the mortgage, and you understand the importance of strategic investment in helping millennials onto the housing ladder.”


Cuthill suggests investors start by considering three questions. First, what is the main criteria for the purchase: do you wish to maximise yields, see capital growth or have the property for family use? Second, how long is the window of investment: five years, fifteen years or longer term? And third, is the investment for one child or more?

“To maximise capital growth, for example, I would look to the new areas of south-east London, where significant infrastructure improvements are planned,” he advises. “If you had bought in Shenfield at the end of the planned Elizabeth Tube line fifteen years ago you would have seen incredible growth. And while values in prime central London are falling, they are still rising in Barking and Dagenham. These areas have dramatically out-performed older, more established markets.”

Typically parents look to help children onto the property ladder once they have left university but those buying for children still at school are primarily focused on rental potential. For them, popular locations include university cities because they provide a steady stream of tenants, notably Bristol, Oxford, Cambridge and York.

UK rental yields vary from 2 per cent in London to over 6 per cent in parts of Leeds or Manchester. But of greater importance in the current low interest rate environment, suggests Charles Curran, Principal and Market Data Analyst at Maskells, is capital protection.

“This can never be guaranteed but can be managed by buying property in areas with low mortgage debt balances, information easily available through the Office of National Statistics,” he says. “In 2009 we saw greater price volatility in areas with higher mortgage debt, so if you are forced to sell, perhaps because of job loss or an exponential increase in mortgage rate, areas with high loan-to-value ratios will de facto have more sellers and therefore greater price volatility. Overall remember that the best way to protect capital is to buy in the right location.”

Weatherbys Private Bank can lend to clients aged over 70 who may want to help buy children their first home, a sensible approach to family wealth planning but one that can highlight different expectations, particularly on property location.

On-trend London areas popular with younger residents, Hoxton and Hackney for example, were simply not on the map twenty years ago and might not resonate with more mature purchasers.

“Investing for your family tends to be a learning curve where parents and grandparents set out with one agenda but then budget constraints or informed opinion opens up other possible options,” says Cuthill.

A good example comes from Marcus Bradbury-Ross, Director at The London Resolution. His British clients planned to buy three investment properties in the new developments around Battersea, primarily to provide an income for their three children, all over the age of 18. Bradbury-Ross suggested creating a more mixed, yield-based rental portfolio combining some properties in new schemes with some set to gain from the Crossrail route. The family followed this advice, buying five properties over two years and placing three of them in their children’s names.

“The children do not live in the homes themselves but benefit from a physical income and inheritance,” says Bradbury-Ross. “One son is now working in London on a salary of £25,000, which would not allow him to borrow more than £100,000. The investment makes financial sense and marks my clients as sensible legacy providers.”

Rising transactional costs, notably Stamp Duty which, since March 2015, can hit 15 per cent for second homes, have further forced families to consider the best way to structure estate planning. Investors face a rapidly changing landscape of new rules and taxes and while they should not expect the same returns as seen in the past, helping children on to the housing market remains a common request.

“The old cliché that inheritance tax is a tax you choose to pay means sensible financial planning will invariably consist of property because the last thing most parents want to do is hand over a six-figure cheque to their children,” says Curran.

Buying property is often only the start of the process, he adds. “We have seen parents provide deposits and then guarantee mortgages but then many may also help with mortgage repayments by making regular gifts from surplus income over expenditure which is reasonably tax efficient.”

Yet another thoughtful consideration for financially astute parents who can afford to give their children a leg up onto the property ladder.

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