A Comparison Of Rental Property Investment Between London And Paris

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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. A properly developed real property will mean a consistent flow of income from the rental payments received. Thus 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. Further more there are other benefits that accrue to buying property. If one buys a house, the investor can live in that house. The property can also be used as collateral for a loan, either to develop the land or for other investments.
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. Investors will require information in the decision making in selecting which city to invest in. This information will be provided in this essay. It should also be mentioned that the global financial crisis can be an advantage for an investor with ready funds. Since the prices of property were affected downwards, buying now will be less expensive. An investor can be advised to buy and wait for the prices to go up for a resale. This essay can be used by those investors who want to take advantage of the opportunity.
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 assess and analyze those success factors that are unique to each of these two cities.
To identify the future trend and existing opportunities in real estate in London and Paris
Consultant Brief
Real estate investment has its unique advantages to the investor. It offers a predictable cash flow when the property is rented out. The property keeps on appreciating in value. The rate of inflation will hardly be felt by the real estate investor. Real estate investment is always a preferred form of investment especially in those economies where the interest rate is low, which affects the inflation rate and hence affecting the mortgage rates (Mueller & Pauley, 1995).
These are the reasons why foreign investors will prefer investing in the European cities including London and Paris, (Stengel, 2010). In addition to these, investors favor investing in European cities with only Asian cities coming to a close second. Other economic factors that affect Real estate investment include the treasury bills and the long-term treasury bonds. The GDP per capita will be a contributing factor in real estate investment as this translates to the availability of disposable income available with the population.
Political stability and economic stability will always be the two determining factors that will attract foreign investment. This is according to a survey by Greater Paris Investment Agency which was in partnership with KPMG (2010). Paris and London are in stable countries and they are ranked third and second respectively. The survey was analyzing the friendliest cities for business investments. According to Rufrano,(Scott, 2010), the two cities 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. Security is another factor that should be considered before one makes a choice of where to invest. There is also the availability of utilities such as water, electricity, communication. This however are readily available in both cities.
Real estate investment can be more than buying a house, land or property. One can invest in the real estate market through a mutual fund (Toronto Real Estate Journal, 2010). This is a preferred way of investing when one does not want too take the trouble of following up with the tenants plus other activities that go with direct real estate investment. It also has the advantages of economies of scale, apart from the benefits of diversifying the investments to several types of property based on location, size and type of property (Dermine & Roller, 2004). An investing company will buy the property and manage it at a fee. The investor will join the group of investors and together they will buy these properties. An advantage with this form of investment is that one can invest with minimal funds. There is the most common type but more risky type of real estate investing. The investor will buy property and wait until the value at this area goes up and sells it. This type is becoming more risky as the prices of property are not increasing at the same rate that they used to.
Apart from the mortgage payment there are other costs that are involved and this may differ in London and Paris. The costs that are involved in London and UK in general include a one time off payments that include a deposit, surveyor’s fees, pay stamp duty, solicitor or conveyancer’s fees, land registration fees, lenders insurance fees (Direct Gov, 2010). There are the monthly payments that are required which will include the monthly mortgage payment, life insurance mortgage protection cover plus other costs which may differ depending on the terms of sale and the property agent. The initial one of cost in Paris will include the deposit, Notaire fees, (a lwayer who is specialized in property matters) property registration fees, life assurance fees, and the agency fees (Angloinfo, 2010). While buying property in Paris, private ownership is advised for long term benefits as compared to business ownership. Business ownership has short term advantages through tax rates but in the longterm the tax is higher (Frenchentree, 2010).
There are legal requirements that should be considered. Notably there is a seven days waiting period after the finalizing the property deal (Edison Ford Investment Property, 2010). Within this period, the purchaser is allowed to withdraw from the sale agreement. In London there is a legal requirement on a tenancy deposit scheme which is a contract between the tenant and the landlord whereby the landlord deposits the tenants deposit with a government approved scheme (Mortgage and Remortgage, 2010).
Data Presentation and Analysis
Today, London is ranked in Europe as the second most expensive European city to rent a room while Paris is ranked fourth. This explains why buying property in these cities is high. However investors prefer to buy real estate as long term investments. The prices vary in the two cities. 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).
However, the housing demand is really strong in the UK and the government does not succeed to build enough houses in accordance to the increase in the number of the immigration and birth rate (Shackle, 2010). Furthermore, most people have second properties or live alone, which is also a reason why there is higher housing demand in the UK. An increase in demand is higher than the price according to the law of the demand and therefore, has to be taken into account carefully. This explains why real estate investment is higher in London than in Paris.
The price of buying a house in London is averaged at £632,000, (BBC News, 2010); the same type of a house will cost $335,000 in Paris. The house prices have gone up by 16.6 percent. Renting an apartment in London is estimated to range between $600 to $900 per month (Renters Hotline, 2010). A house in the same area will be rented for between $1,000 and $1,800. An apartment in Paris will be rented at an amount ranging between $650 to $2,300 (Paris Housing Services, 2010). A two bedroom house in Paris will be rented at an average of $5,300.
A further 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. 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 cities and the cost of living in general. It would be wise to buy and rent out property in Paris. This choice is also wise as the tax rate will be lowered as the investor will only be taxed the property tax, while the residence tax is charged on the resident.
The preference in buying property either in Paris may be affected by other factors apart from the price. The capital gains rate of tax in UK is a flat rate of 18 percen...