Why glass ceilings could hold back your property valuation

If you watch the television property programmes you will no doubt have heard the term “glass ceiling” on numerous occasions. It is a very interesting phenomenon and one which some people dismiss at their often significant costs. So, what is a glass ceiling with regards to property and how should you approach the subject?

Property valuations

When it comes to property valuations, the glass ceiling is the maximum price that investors will pay for a particular type of property in a particular area. Even the quickest of glimpses through the property listings will give you an idea of the maximum value of properties in a particular street/area. This then prompts the question – if you renovate and improve a property then surely the price/value must go up?

In theory you will add value to a property when you improve and renovate to an appropriate standard. The problem is that any asset is only worth what the market is willing to pay. So, if you paid £230,000 for a property on a particular street and spent £25,000 on renovations, then your all in cost is £255,000. However, if the perceived glass ceiling for that particular street is just £250,000 then you have not even covered your additional expenditure.

Rent costs

While there is obviously an element of capital gain when it comes to property investment, the simplest method of valuing a property is by the income it creates – i.e. rent. If we work on a circa 4% rental yield for a particular street then a property worth £230,000 would bring in £9200 rent a year and a property worth £250,000 (at the top end of the street valuation) would bring in £10,000 a year. So if the maximum rental income per year is £10,000 and you have invested, using the example above, £255,000 then your rental yield has fallen to 3.92%. In other words, at that particular moment the market is not appreciating the additional work you have carried out when it comes to rental income.

It is obviously very important to take into account rental income where you have a buy to let property. This may cover the majority (if not all) of your mortgage payments or if you purchased with cash then it is the gross income on your investment.

Glass ceilings do move

We are not trying to give the impression that glass ceilings are stuck at a particular level forever and a day. There are a number of reasons why they may move upwards, or even downwards, such as increased popularity, infrastructure expenditure, blooming local economy and in some cases a mushroom affect caused by more affluent areas close by. Put in the most basic terms, a glass ceiling on property prices/rent is a reflection of the income and wealth in the area.

If you are looking to acquire a property, and maybe renovate, it is essential that you are fully aware of both the maximum price band and rental income in the area. You might be the one to smash through the glass ceiling but don’t bank on it!

Conclusion

Many people watching the television property programmes often dismiss the idea of a glass ceiling for property prices and rental income. While based on a range of properties in a particular area we appreciate there are exceptions to the rule. However, like King Canute when he tried to turn back the tide, it is not easy to change the direction of market forces.