A Comparison of Rental Property Investment

Name:
University:
Course:
Tutor:
Date:
Real Estate: A Comparison of Rental Property Investment between London and Paris.
Background
Real estate investment is an appreciated form of long term investments and always preferred to the long-term stock investment. Real estate refers to the property, which is land plus the building and any other development on the land including fencing, building and any other on site improvement (Smith, 2007). A properly developed real property will mean a consistent flow of income from the rental payments received. According to, Hareyan, 2010, the investment realizes a consistent, predictable cash flow. In the long term, the property is bound to increase in value as a result of appreciation, thus its capital value continues to increase.
Despite these facts, the global financial crisis had its effects on real estate investment. Real estate investment differs in different cities. The differences are as a result of various factors. This essay will analyze real estate investment in London and Paris. London and Paris are the best cities to invest in (Greater Paris Investment Agency (GPIA), 2010). The essay will compare property investment in the two cities as it highlights the factors that are responsible for the differences. An analysis of the effect of globalization and the impact the recent global financial crisis had on real estate investment in London and Paris will be part of this essay. Real estate investing is an investment portfolio that is preferred by many investors worldwide (Smith, 2007). Investors will require information in the decision making in selecting which city to invest in. This information will be provided in this essay. Real estate property valuation is complicated but it is important for an investor as it will be used to determine how much profit an investor will make in future.
The value of property will depend on several factors with location being a big influence. The population density will usually influence the value of the property as density of occupation will be used in determining the value of the cost per unit value of property (Price and Clark, 2009). To get the real value of property will in most case require an expert. The expert will in most cases provide the market value of the property which is the value between a willing and informed buyer and an independent seller in an arms-length transaction.
To value the building and its performance, the valuer will usually use the cost per unit price and how much that unit is likely to bring back in terms of sales. This will be compared with the value the property is expected to return back as returns and how long the returns will take to bring profits to the investor (Hareyan, 2010). This market value will be used to determine the investor value, the insurable value and the liquidation value. Investor’s value is the value the investors pay for the property. The insurable value is the value that insurers will use to determine how much insurance premium to be charged to insure the property. Liquidation value is usually used in filing for bankruptcy (Smith, 2007).
Aim
This research is aimed at comparing real estate investment opportunities between two of the most famous European cities, London in United Kingdom and Paris in France.
Objectives
The researcher expects to achieve three objectives by the end of this research;
To identify the factors that lead to the differences in real estate investments in the two cities.
To identify which real investment method is suitable for each individual investor.
Identify why landlords choose rental business investments and offer useful information while making real estate investments.
Consultant Brief
The researcher will be a consultant of BNP Paribas Real estate. BNP proposes and provides its wealthy clients with a full range of services including consultancy services, asset and property valuation, investment management, property management and property development. BNP has clients located in 29 countries including France and the United Kingdom (BNP Paribas Real Estate, 2010). The number of clients that are interested in rental property business in France and UK has recently increased. BNP wants to satisfy its customers and requested for an analysis on the potentiality of business in the two major cities in the two countries, that is, Paris and London.
Of particular interest is a wealthy investor, a client of BNP Paribas who wants to base his investments in one of the two European cities, London and Paris. The investor intends to be a full time investor in real estate in a portfolio that will result to long-term and short term benefits. BNP recommended a mix of both house and business real estate. This paper will evaluate the potential return on investment of the basic rental properties in general so as to include house and business real estate within the two European cities London and Paris.
Research Design/Methodology
The study seeks to analyze real estate business in London and Paris in order to find out the best location to invest for each individual client. This will be achieved by analyzing property investment business trend in each of the two cities. The factors that influence investors in each of the cities will be analyzed first. The researcher will use secondary data; the source include other research work related to this, books, journals as well as other literature that are reliable and trusted. Future trends as predicted by those who are familiar with the industry will also be analyzed. The results of this research will be used by BNP Paribas Real Estate in advising their wealth client and any other clients interested in real estate investing in London or Paris
The study will incorporate two main methodologies; qualitative research methodology and quantitative methodology and it will adopt a number of data collection techniques to ensure it captures all the required data and information necessary for inferences, recommendation and conclusion to be made successfully. Presentation of analyzed data will be done by using tables. Data analysis will be done using descriptive statistics.
Research approach
Qualitative research and quantitative research approaches will be used during the study, according to Yu & Cooper, (1983) this will enable the research to be broad and cover all the requirements of the research topic.
Population study
The population of interest is population of investors that have real estate in Paris as well as London. This is because they were in a better position to provide me with necessary and relevant information as regards to investing in real estate in the two distinct locations.
Factors that influence investors
There are various reasons as to why investors will choose rental business investments, as a type of pension planning, re-mortgaging and the government regulations (Mellish & Rodden, 2008). According to research, there are three types of investors, small scale amateur investors who are mainly landlords, speculative investors who are mainly interested in short term growth and professional landlords whose main source of livelihood is earnings from the rental business (ECOTEC, 2008). An investor will need to know the potentiality of getting a return from his investments which will depend on the availability of the market for the products or services. According to Rufrano,(Scott, 2010), London and Paris are preferred for long term investments as they are considered safer as compared to the emerging cities. Though there is severe competition, opportunities still exist.
The availability of a market for a real estate investor will be influenced by a few factors in the economy, the political stability and economic factors taking the lead (Greater Paris Investment Agency, 2010). The economic factors include the treasury bills rate and the long-term treasury bonds rate, the GDP per capita which translates into the availability of disposable income available with the population, and the Consumer Price Index. The difference in investments in any country will be determined by the country’s GDP rate of growth (Pollard, 2010).
The economy in UK suffered an economic recession in the last few months of 2008 all the way to the year 2009 (CIA, 2010). The real growth GDP rate went down to an estimated -4.9 percent in 2009,this being at position 184 in country comparisons while the GDP per capita went down to $34,800 in 2009 from $36,700 in 2008. The reduction in the GDP means that there was less disposable income to be invested.
As compared to London France GDP was less affected by the global crisis. The country’s GDP went down by 2.2%. The real growth GDP rate for 2009 was estimated to -2.5 percent being ranked at position 154 in country comparison to the world. The GDP per capita was $32,600 a decrease from $33,600 in 2008. This explains why there was a reduction in gap in real estate investing and prices between the two cities. A recent cost of living survey by Mercer (2010) ranked both London and Paris at the same position. Yet the real estate prices are more favorable in Paris than in London (Smith, 2007). According to this report by CIA Worldfact book, France is one of the European Union countries that was least affected by the global economic crisis (CIA 2010). This explains why real estate prices decreased in London more than it did in Paris. The UK citizens have a higher average income per capital of $35,200 whereas the French citizens have average income per capital of $32,800 meaning that they are healthier in terms of economy and have higher potential to rent or buy a house (CIA, 2010).
An analysis will reflect the difference in the cost of living and the consumer price index (CPI) between the two cities. The CPI is 110.61 in London and Paris. This translates to 10.93 percent higher in Paris. The rent price index in Paris is higher, it being 130.50 as compared to London’s 118.47. When the rent index is included the CPI, the CPI changes to 114.96 in London and 108.50 in Paris, translating into 14.36 percent difference with London being on the higher side. This is important when considering real estate investment as rents and property will always have an effect on the cost of living. The two are in separable.
There are several methods an investor can use while investing in real estate. There is buy to rent, buy too sell and through the mutual funds. Whatever method the rent rates will be a contributing factor on how fast the investor realizes a return on the investments. An analysis of the rental prices would therefore be of importance for comparison purposes between London and Paris. The cost of renting a three bed roomed apartment in London, and within will cost $4,642 within the city center and $2,587 outside the city (Numbeo, 2010). The same sized room will go for $2,654 in Paris city center and $1,991 outside the city center.
The prices in London are almost double when compared to Paris, the rate being 38.68 percent lower in Paris. The same is reflected when one is considering buying property. The price per square meter in city center in London will go for $14,459 and $10,277 in Paris, both within the city centers. A square meter outside the city center will be $8,675 in London and $7,435 in Paris. These high prices in London are more affordable since their disposable income is higher than in Paris. The median monthly disposable salary after all taxes have been deducted is $3,173 in London and $2,434 in Paris. However London mortgage rates are friendlier.
The annual mortgage interest rate is 4.86 percent as compared to 5 percent in Paris. This means it is more expensive to rent a house in London as compared to Paris. This is however true but one also has to consider other factors like the disposable income between the two ...