How to analyse property fundamentals

You have a property and a project in mind – now comes the time to analyse the fundamentals of the investment.

Buying any type of property to rent requires planning. The same applies to building a property portfolio.

The key difference between investment and speculation is that speculators look only at the surface when considering an asset, making purchases based on price movements alone.

Investors, on the other hand, put capital into assets with a view to generating a less risky, more stable return over the medium to long term. Investors are most successful when they look at the underlying financial attributes of an asset in order to determine its true or ‘fundamental’ value.

Income and growth: the two chief attributes of property

The underlying attributes that determine whether a property investment is a good one or not are the income it generates and the value it accrues over time.

Income relies on low running costs and stable or rising rents

Income is typically synonymous with profit, and distinct from cash flow. Whilst it is advisable to calculate both, income gives a more overall picture.

For a positive income, the rent earned needs to cover the operating costs. For income to grow, the rent needs ideally to rise at a faster pace than operating costs (or remain stable while costs fall).

This is contingent on two factors:

  • Rental demand. Is it high now, and will it remain high in the future?
  • Tenant affordability. Do local wages constrain how high rents can realistically rise?

Analyse current and past trends

Before you begin forecasting future movements, statistical analysis of local rents and wages can help to paint a picture of current trends and how they relate to past trends.

The Office for National Statistics (ONS) conducts an Annual Survey of Hours and Earnings (ASHE), which is an excellent source of data on current and historical wages that can be broken down by local authority.

Local rents are harder to trend reliably. The Valuation Office Agency (VOA), who collate private rental market statistics for England, advises that the samples used to produce its data are neither statistical nor consistent. Nevertheless, the local data available for each of the countries in the UK – maintained by the VOA, Rent Service Scotland, Gov.Wales, and the Northern Ireland Department for Social Development – can help to establish general patterns.

ONS’s Index of Private Housing Rental Prices takes a broader look at regional movements across the whole of the UK.

Other indices, such as the HomeLet Rental Index, also offer a broad look at a number of different metrics.

Anecdotal accounts
The opinions of local letting agents cannot be discounted, for although they will be more subjective than hard data, they will also take into account the most recent developments. If you do speak to local agents, contact as many as possible in order to assess a wide range of views.

Growth relies on both fundamental and economic factors

The supply of and demand for property in an area has a profound effect on price movements, but this is only part of the story. Local wages once again play a part, as this affects how much people can pay for a mortgage and therefore how much they can borrow. The availability of mortgage finance also plays a part.

Analyse current and past trends

You can use a number of sources to examine local prices and track historical price movements in an area.

  • The Land Registry’s price paid data for England and Wales allows you to search for transaction details by county, district, postcode, street or even building number. The data goes back to January 1995.
  • Registers of Scotland collates data on all sales and transfers in Scotland since 2003, recorded at the local authority level.
  • In Northern Ireland, Land and Property Services maintains the Northern Ireland Residential Property Price Index, which provides quarterly house price data from Q1 2005 from district to national level.
  • Online property portal Rightmove combines data from the Land Registry, Registers of Scotland and Zoopla to track sold prices and estimated current values at a granular level.
  • Detailed data of this type is not available for Northern Ireland; for purchases in this area, you may have to rely on information from local agents (see below).

Flat or shrinking average wages in an area may prohibit the degree to which local property prices will rise. Consult the ONS ASHE report for this information.

Anecdotal accounts
As with rental levels, speaking to local estate agents can yield up-to-date information on local prices and their recent movements. Speak to as many agents as possible to get a range of views.

Side note: always plan a project and ensure your goals are realistic

When you purchase a property, it should ideally be for as low a price as possible, and the prospects for future gains should be good.

If your project involves renovating a property, be sure that you have not overestimated the value that the works will add. Local prices will often limit the cost benefit of renovating a property. Always commission a pre- and post-works survey and plan your project thoroughly from start to finish, obtaining detailed quotes for every job that needs doing.

Analyse causal factors to forecast future trends

Having established statistical trends, you can look deeper at the fundamental factors that affect the supply of and demand for property in an area and aim to forecast future movements.

Supply: population growth, development and housing density

Current and past population figures can help to create an idea of how quickly the population in an area is growing, and might give some clue as to the future of rental demand in that area. ONS maintains a database of population estimates for the whole of the UK.

Housing supply trends
The Department for Communities and Local Government (DCLG) keeps live tables on house building, including annual and quarterly analysis for unitary authorities, London boroughs, metropolitan districts and shire districts, broken down into starts and completions by private builders, housing associations and local authorities.

New development
You can find out about the development of new housing in your area from a variety of sources:

Brownfield development, building denser housing or converting properties used for purposes other than housing is one way to increase housing supply in an area without necessarily using new land. Does the new development comprise single dwellings or apartment blocks? Is it replacing similar property or being built on previously unused or lower-density residential land? Is it replacing or being converted from industrial or commercial property?

Also look out for planning applications or permissions for the subdivision of land. Subdivided land is usually easier to develop and creates more opportunities than a single larger area of land.

Demand: Economy, infrastructure, investment and services

All of these factors will determine how attractive an area is or will become to both renters and buyers. Increased demand from renters will add upward pressure to local rents, whilst increased demand from buyers will contribute to local property price growth.

Finding a definitive source for information of this nature is difficult. You may need to explore a variety of avenues, such as:

  • Contacting local planning authorities and searching for planning applications using the information above
  • Contacting local estate agents and enquiring about developments that may make the area more desirable
  • Searching for the area online to find any news about new developments or business growth
  • Visiting the area in person

Economic activity
Established businesses relocating to or growing in the area, business start-ups and relocating public sector jobs can all increase economic activity in an area and drive more people to move there.

Entertainment, retail and transport
Private and public entities will frequently invest money in regenerating shopping, entertainment (bars, cinemas, clubs, theatres) and transport infrastructure in an up-and-coming area, or even building such infrastructure anew.

Major regeneration
Alternatively, a whole area of a town or city may receive major investment for the regeneration of multiple features; often an indicator that the area will become significantly more desirable in the near future.

Public services
New hospitals, schools, universities and other public services are often a sign that an area is becoming more attractive.

Project your rate of return

If you have an idea of what the future rental income and value of your property will be, both after the works are concluded and the property is let, then you will be able to calculate the hypothetical return on your capital investment at a given point in time.

More information on this useful formula, which takes into account changes in value, start-up costs, mortgage repayments and the amount you have invested into improving the property, can be found in our article How to calculate your property’s true rate of return. You can also make use of our rental yield calculator, a link to which can be found just below this article.

If, having examined the fundamentals, you would like to proceed with your project, then apply for a bridging loan or call an advisor free on the number at the top of this page to discuss your application.

This information should not be interpreted as financial advice. Bridging loan rates are subject to change. Speak to our advisors for a loan illustration.