During a crisis, one of the most important questions is where to invest your money without risk or loss. In conditions of uncertainty, when the economies of most Western countries are in turmoil and Britain’s financial system is going through the consequences of Covid while fighting growing inflation, this is not a question of making a return on investment, but of preserving capital. Why is property in Britain such a liquid asset? What factors must be taken into account when purchasing it? What type of property is better to invest in? Kommersant UK discussed these issues with Herman Abel, the founder and joint-owner of the developers In Dome Capital.
Your company is involved in development projects and investments. What type of property do you specialise in?
The company is involved in developments in London and the South. Our investment model is called Smart Equity. We enter projects as a senior partner, providing financing, skills and contacts. If a developer has completed only five projects rather than fifty and is not sufficiently experienced, then they’ll need a more experienced partner in order to receive financing. With our support the loans necessary to realise the project will be approved by the bank. The main area of our company’s activity is the construction of residential property for families; houses and apartments with four or five bedrooms. Why is this area a priority for us? We are on the verge of heightened market turbulence, and in any crisis, it is the family that becomes the engine of the economy. The middle class is the segment of our society which the government most actively supports. If any social programmes are launched to support the acquisition of property, they are always aimed at families. For example, there is the Help to Buy programme, which helps people, particularly families, to get their feet on the housing ladder in Britain. Families are supported on the property market during crises in other countries as well, including Russia.
On what criteria does your company decide which projects to work on as a senior partner?
For projects in the residential sphere aimed at families, we make a business plan and evaluate their financial viability. This depends on many factors, such as the location of the property, its design and the taxes to be paid, which vary according to the region and district. We also look at the competition, demand for properties, measured by the speed of sales, and changes to the demographics of the region. We try to understand the market conditions; what target audience should we expect? There are families that need housing for £300,000 and there are others who are ready to acquire a house for £750,000. Additionally, we pay attention to local factors such as access to a quality education. In Britain, houses on neighbouring streets can differ in price simply because they fall into different school catchment areas, which can increase the cost of housing by 10-15%. People move to different towns or areas simply so that their children can go to a certain school. This is strongly reflected in the demand for and cost of properties.
Does the British construction industry have any special features?
I would say that Britain particularly stands out as different in this area. All new builds follow a certain architectural style; brick facades, a tiled gable roof etc. This is not high-paced construction with the aim of getting the maximum number of people to move into the development as soon as possible. Another unusual feature is that they build more houses here, whereas in Russia, Ukraine and Estonia the opposite is true and apartments dominate. Secondly, in Britain, new technology is integrated slowly. For example, the volume of modular construction is much lower here than in other countries such as Germany, Estonia, Finland and all of Eastern Europe. This happens due to local council regulations about the external appearance of homes. 80% of homes here have brick facades. Making them is a laborious and expensive process which is completely incompatible with modular building. The insurance market here is also very conservative. Quite often they have their own views about which type of construction materials should be used. If the developers prefer a more modern method, then they refuse to insure the project. As a result, the insurance market for modular building is shrinking, which is reflected in the mortgage market, where supply is also decreasing. Without insurance, banks do not wish to finance or issue mortgages for certain types of property, such as modular housing. This is ubiquitous in many countries but very rarely found here. The insurance companies believe that if this type of building turns out to have a structural defect, it will be extremely expensive to correct it later. This is the third factor. Of course, people try to experiment and promote new types of construction but so far these are just isolated cases. Although in magazines and on the news they say that new technology is being applied, statistics show that in Britain 175,000 new houses appear on the market each year and 174,000 of these are built using sixty-year-old technology. Clearly, with these construction methods, it’s difficult to increase the volume of new housing built.
Is the slow adoption of new technology reflected in the price of new properties?
On the British market, in contrast to the markets of other countries, speculative development dominates. This is to say that when a construction company such as ours starts a project, we don’t know what the final sales price of the development will be. We set a price on the basis of various measurements in an attempt to predict it. Our margin of error is usually about 1-2% because we take into account influencing factors such as location, design and the cost of completed homes currently on sale in the area. For a construction company, the cost of building work is a key factor in their income, although this does not affect the final sale price of the property on the market, irrespective of how much has been spent. The house will cost as much as people in that area are ready to pay for it. Of course, you can hire a designer who will make the project more eye-pleasing and ergonomic, then there is a slight chance that you will be able to raise the value of the property and get a top price, 3-10% higher than otherwise. However, it is practically impossible to sell a two-story, four-bedroom house with 120 sq m (1,290 sq. ft) floor space (this is typical housing in Britain) for £800,000 when the house next door costs £600,000-£620,000.
Deeper analysis, of course, takes into account macroeconomic indicators, inflation pressure and Brexit…these are reflected in the price of construction materials, and overall profitability for developers. If projects become unprofitable, developers deliberately delay leasing finished properties, or simply build less. Consequently, fewer new developments enter the market. This exacerbates the general housing shortage and as a result, prices begin to grow again. In the longer term, the growth in the price of construction materials of course makes property developments more expensive, although there is no direct correlation.
What difficulties does the construction industry currently face? For example, what is the situation for recruitment? What professional qualifications are in demand?
I can’t give you a professional consultation on this matter as our company does not carry out construction work directly (we hire contractors). However, going by what I know and what I’ve seen, there is a shortage of skilled workers such as masons, plasterers, carpenters and electricians. This is a long-standing problem, and each year it only gets worse. In my view, this is because young people in England don’t want to learn these building skills as they are unpopular and not prestigious, although these professions are very well paid. Right now it’s fashionable to be a tik toker, a blogger, an instagrammer or a trader. If you take a close look at the people queuing up in hardware stores, you’ll see that most of them are in the 50+ age category. This is the first factor. The second is that the market here relied for many years on cheaper but highly skilled Eastern Europeans, many of whom have now returned home as the economic situation in their countries has improved. Many of these people saw Brexit as a stab in the back; with that and the pandemic, the number who have left is well over a million. Both these factors have had a strong impact on the labour market for skilled construction workers. Managers, surveyors and designers etc are a more stable segment of the workforce (these highly paid roles are predominantly filled by English workers).
During the pandemic, the property market has grown again. Country houses with gardens have enjoyed particular popularity. What housing types are currently in the greatest demand? Have location preferences changed? For example, previously, return on investment in the regions was higher than in London, has this trend continued?
In Britain, they buy everything that is built. Here the housing shortage, which is said to be ‘structural’, is so acute that in our lifetimes it will never be rectified. The current deficit is approximately a million housing units. With an average floor space of 100 sq ms (1,076 sq ft) per property, this makes the shortfall around 100 million sq ms. When population growth is taken into account, for this structural shortage to come to an end the number of new houses built every year must be increased. An extra 150,000 housing units per annum is needed. But construction rates are stable, on average about 150-200,000 housing units are built every year. With a high demand and a growing population, this is not enough. (Britain has one of the highest birth rates in Europe, a long life expectancy and an influx of migrants. There are around 250,000 to 300,000 new residents every year). This is why everything on the housing market sells. Depending on its category, some things sell more quickly, other things more slowly.
During the pandemic, there was a lot of hype about buying rural properties. This has now quietened down, but the trend for movement from the towns to rural areas has continued. This is the first time this has happened in 250 years. This is why, in the long term, family homes in rural areas will be in demand, just as other property types will be. The only question is what inflation will be like in this market. Over recent months, property prices in city centres have also risen, but more slowly than in rural areas.
Is demand higher for new builds or resale?
This all depends on the particular situation, the level of inquiries, your requirements and the assessed profitability of the property. If you buy a new build, you don’t have to spend anything doing it up. In Britain, 100% of housing is sold in a finished form, so they have everything; a fitted kitchen, plumbing and sometimes even furniture. In other countries, such as Russia or Estonia, flats and houses are often sold without fittings. They are described as either ‘black key’ if the walls are plastered or ‘grey key’ if they are bare brick. This never happens in the UK. However, new developments are always something of a lottery. New neighbours, unfinished infrastructure (will they build that nursery?) and transport links. On acquiring a new build property, you don’t know what kind of neighbourhood you’ll end up living in, and whether it’ll be thriving or depressed. Resale properties require an extra investment of time and nerves as you’ll have to make efforts to make the house look presentable. When buying an existing property indicators such as the character of the neighbourhood can be taken into account during assessment as the demographics of the area are already known. The local infrastructure and transport links are also important. New builds are roughly 3-7% more expensive than resale properties.
Has the rate of property price increases in London already overtaken the regions?
London is very diverse. It contains ultra-premium and premium segments, well-to-do and not-so-well-to-do areas as well as the suburbs. It is a city of enormous size and the differences between its areas are reflected in variance in quality of life, living standards and demography. Two neighbouring districts may be inhabited by people with widely differing income levels. Some play golf and sail on yachts while others struggle to make ends meet. This means that for different market segments there are differing levels of demand. For example, foreign investors often acquire property in expensive neighbourhoods as an asset. However, several years ago in Britain the government started tightening everything up. They strengthened checks on illicit capital and the origin of incomes. It became more difficult to invest and no one wanted to risk their capital.
How has the economic crisis affected the construction industry? Why have property prices continued to rise even as people have become poorer?
The crisis isn’t being felt keenly yet. We haven’t come into it at high speed, instead we’re falling into it gradually. This is why I look at the property market with a healthy dose of optimism. Property is a unique asset which is liquid in both good times and bad. In good times people have high purchasing power so they look optimistically at the future, they spend money freely and they are ready to improve their housing conditions. Property prices grow, and rather quickly. During a crisis, their behaviour may be very different. On the one hand, people are trying to save money so they are not in a hurry to expand their living space, but on the other people with free capital have nothing to invest in, as the share market and cryptocurrencies have collapsed, there is a low level of trust in the banking system and an unfavourable climate for investment. In these conditions they start to invest in property, one of the most reliable and tangible of assets. In good times people invest in property because prices are growing, but in a crisis, they do it because it offers reliability as in the medium and long term, the property market will only grow.
Is it better to invest in premium developments or more affordable ones?
This depends on your personal strategy, which it is important to work out before making your purchase. For example, I know very many foreigners who have bought apartments in London and rented them out. But this is more taking on an encumbrance than a business venture. It involves a lot of hassle, and the income is small, as although one flat is better than nothing, it does not make an investment portfolio. If someone has significant capital then I’d recommend them to choose a clearly defined strategy, select specific properties depending on their priorities and devise a plan for what steps to take to enter this sphere. There is no universal answer to your question. You need to think about what kind of tenants you'd like to deal with; people with stable incomes, or those with low revenues who will pay at irregular intervals. You have to understand that premium, more expensive properties can be just as profitable as more affordable ones. How are you going to manage your property and who will help you if you live abroad? Do you trust this company? What range of services do they offer you and what commission do they charge? These questions are of strategic importance. If you think all these things through carefully, then it doesn’t matter what segment of the market you choose, as any is sure to be profitable.
What would you choose yourself?
If I was preparing an investment portfolio, I would focus on what properties I could acquire to ensure that my tenants would be families with children. This is because even during a global crisis when many people are out of work, couples with children have to find jobs and raise children. Come what may, they’ll need the square metres where they will build their lives. Of course, there are risks in every segment of the market. For example, during the pandemic, the market for commercial rentals really sank. It was the same for student housing. The students all went off home.
Have people with Russian citizenship encountered problems when investments in property in Britain?
The situation is changing very quickly. For citizens of Russia and Belarus with residency permits in Europe, nothing has really changed. They can buy and sell property as before. Russians and Belarusians without residency permits have been picked out as a caste of untouchables; no one will take their money on any pretext for fear of sanctions from the regulatory authorities, although from a legal perspective, there is not yet any formal prohibition on the sale of property to citizens of these countries.
