London property on upward curve as recession fears recede

The many Irish investors who flocked to London to buy property over the past couple of years must be feeling pleased with themselves right now as prices there seem set on a steady upward curve after something of a roller-coaster over the past year.

As long as they haven't left things too tight and fallen victim to an excess of supply over demand in apartments in some areas of central London, they are sitting pretty. Property is becoming the cautious flavour of the month in the British capital again after a long period in the doldrums.

The reason, after a considerable degree of turbulence in the past 12 months, is the general belief that the British economy has finally beaten the boom-to-bust tendency which has bedevilled it in recent decades. Fears of a recession last winter have given way to optimistic growth forecasts and the property market, boosted by exceptionally low interest rates, has mirrored those developments.

It was doing quite nicely a year ago - although very modestly by Irish standards - but went into decline last autumn and winter when prices fell by 1 per cent and developers began offering all sorts of incentives to attract investors. They included price cuts and guaranteed rents of up to 10 per cent for two years and were accompanied by a spate of advertising in foreign markets, particularly Ireland.

Since the start of this year, however, the market has been rising again as the dangers of a recession declined. In addition, the Bank of England's interest rate cuts have reduced mortgage costs to levels not dissimilar to those to be had in the euro-zone and made home-owning very affordable in comparison to recent decades. UK government forecasts also expect the number of people renting rather than buying to increase because of the rising number of one-parent families.

Yet there has been a noticeable reluctance by both British individuals and institutions to get into property investment. Part of the reason is psychological: many still bear the financial scars of the last property boom and bust at the end of the 1980s. According to the Nationwide building society, the average house in Britain cost only 12 per cent more at the end of last month than it did at the peak of the boom ten years ago.

Indeed, prices in some areas like East Anglia have not yet recovered their 1989 levels.

Apart from that, there are no particular tax incentives for British investors to put their money into property. By contrast, they can hold reasonable amounts of shares, bonds and cash in ISAs, which are tax-free.

This has left the London property market, in particular, open to foreign investors of whom the Irish have been the latest wave. With the Asian economies beginning to pick up, they may face more competition again from that quarter. In addition, the rise of sterling and the fall of the euro has opened up a considerable gap in prices.

Apartments in London at around £200,000 sterling may not look hugely dearer than their equivalents in Dublin but that is equivalent to some £240,000 in Irish terms. Nevertheless, the yields are better in London - though not always as good as the ads claim - and it is possible through company structures to write-off mortgage interest against rental income there, unlike at home post-Bacon.

Buying property directly has its risks as well as attractions: you have to be sure of where you are buying, especially in such a patchy market as Britain's, and you have the extra hassle (and costs) of finding tenants, collecting rents and carrying out repairs. The Joseph Rowntree Foundation estimates, for instance, that between 30 per cent and 43 per cent of the 9.9 per cent gross yield on property in Britain goes on management costs, arrears and periods when the property is empty.

For anyone who doesn't want to actually buy and run an apartment but wants to become involved in the British property market, there are other vehicles for doing so. Perhaps the simplest for those who are comfortable with the stock market is to buy shares in some of the property or construction companies involved in the market, some of which are also available on the Irish Stock Exchange. Another option is investment trusts (quoted companies which simply own shares in other companies), which are also available on the stock market, or unit trusts specialising in property.

Other vehicles for investment have also emerged. Dublin auctioneers Sherry FitzGerald recently launched its First UK Residential Property to raise IR£5 million to buy and rent residential property in the UK. It plans to use the money to borrow up to 70 per cent of the price of each property it buys, pay off the loans with the rent, and sell the lot and return the proceeds to investors after ten years.

Equally, Davy Stockbrokers have just completed the offer of index certificates which track a commercial property index in Britain. Unlike the Sherry FitzGerald scheme (which pays no dividends), they will pay an annual income in line with the index (currently 7 per cent) and range over three periods from three-and-a-half years to seven-and-a-half years.

SUCH schemes can be attractive to people who do not want to become involved in property management themselves or who want a wider exposure to the market as a whole than ownership of one or two properties. They carry an additional cost, however: the operators usually take an extra percentage with First UK Residential Property taking an annual fee of 0.8 per cent of its portfolio's value. Unlike shares or property itself in a firm market, they are not always easy to cash in if you need the money before the set periods are up.

For many other Irish investors, though, part of the unique appeal of property seems to lie in owning the actual bricks and mortar.