As we approach the middle of the year, and with it our first anniversary, I wanted to take a moment to reflect on the state of the U.K. property market, and give an update on our performance.

The last year

Since our public launch last year, the property market has seemingly been relatively quiet with national HPI in the 3 months to February running at 1.4%^.1 - something that has not been a characteristic for many years!

That said, the headline numbers mask the large divergence seen at the regional level as can be seen on the chart below. What is really noticeable is that the grey block is wide and shows that, while that headline figure is only modestly positive, there are many regions that continue to experience positive property price returns - and remember that individual properties within those regions will offer their own opportunities - these are the properties that we spend our time looking to identify for you to invest in.

Figure 1: Regional price changes over latest 3-month period versus 1-year earlier

This softening of the market has largely been driven by two key macroeconomic dynamics (although there are other factors):

1. Market uncertainty around Brexit has caused a demand collapse which has weighed on overall pricing and increased the liquidity premium payable by sellers. The sales pipeline reflects this with new buyer enquiries falling for the third consecutive month³ with sales lead times extending.

2. Government policy over the past couple of years to reduce the attractiveness of the buy-to-let market from an investor perspective is really beginning to bite as increased stamp duty and reduced mortgage interest relief has increased supply of stock available.

This is a pattern that is likely to continue for some months. Looking to the regions, the areas most impacted are those facing the brunt of the two factors highlighted above - London and the South East - with other areas such as the North West seeing positive price momentum.

In the lettings market, the latest Royal Institute of Chartered Surveyors (RICS) U.K. residential market survey² indicates that tenant demand remains on a ‘gently upward trajectory’ and with landlords exiting the market at unprecedented levels, the rental market looks set to continue to see upward price pressure.

British Pearl's performance

As a relatively young business, we are cautious of producing statistics without a long track record to back them up but understand that this is something that is very important to each of our investors. As a result, we have estimated the current valuations of the existing investments which we believe are all in positive territory since launch. The following chart shows the property returns from purchase price to current valuation estimates.

Figure 2: British Pearl property price estimates from purchase to March 2019

Source: All estimates are using purchase prices, external RICS valuations at point of purchase, any additional external RICS valuations and estimates based on Land Registry data up to March 2019.

Then focusing on our two key investment products we have some overall statistics including risk (showing loan-to-value estimates) plus the returns that the share investments and loan investments have made (both realised and unrealised) at a high level using the latest property valuation estimates³.

• Negotiated discounts to (published) RICS valuations averaged 11%
• LTV at property purchase averaged 60% - estimated at 54% using the latest property prices
• We have faced no defaults and continue to pay both interest and dividends in line with forecasts
• Share Investor average annualised returns estimated at:
  • Since inception unrealised capital return 13.9%³
  • Since inception dividends paid 3.3%⁴
  • Loan investor average interest paid of 4.2%⁴

Of our 3 properties that have been opened into the Resale Market, the Indicative Share Prices and revised LTVs are⁵:

• Acton £1.17 with LTV at 39.8%
• Portsmouth #1 £1.01 with LTV at 65.9%
• Andover £1.11 with LTV at 52.4%

For a full explanation of how we calculate the Indicative Share Price please see the FAQ here.

Looking forward

While we acknowledge there are near-term uncertainties facing all asset classes from government bonds to stocks and shares through to property, we believe that the medium-term outlook remains positive. Times of perceived increased risk are some of the most interesting times to be able to identify opportunities since many investors are looking elsewhere as a result of those headline risks.

With the strong, long term, underlying supply and demand dynamics of the property market (for more information see our blog "Is now the right time to buy U.K. property”) together with a buoyant rental market we feel that it is unlikely that prices - particularly those outside London and the South East - will face too much downward pressure and if they do, the period of recovery should be relatively short.

At British Pearl we work hard to buy well - this means identifying regional opportunities and then carefully selecting individual investment opportunities for purchase and building in as much capital protection as possible. This means that our investment properties should be well placed to outperform the overall property market over time.

In short, there are always new market opportunities. We believe that when there are headline risks that are driving headlines nationally and weighing on the confidence of investors, then it’s a really interesting time to be scouring the marketplace to identify interesting investment opportunities.

James Newbery is Investment Director at British Pearl

When you invest with British Pearl, your capital is at risk and invested sums are not covered by the Financial Services Compensation Scheme (FSCS). Forecasts are not guarantees and performance may vary. Tax treatment depends on individual circumstances and may change. Read our key risk statement.

Sources

1 Bank of England, Inflation Report May 2019 using Land Registry data to February 2019.

2 RICS reports March/April ‘2019: UK Residential Market Survey’.

3 All estimates are using purchase prices, external RICS valuations at point of purchase, any additional external RICS valuations and estimates based on Land Registry data up to March 2019.

4 Estimated to April 2019 since the purchase of the first test property in Acton a year prior to soft public launch, with dividends started post soft public launch.

5 All estimates are using purchase prices, external RICS valuations at point of purchase, any additional external RICS valuations and estimates based on Land Registry data (up to March 2019).