Commercial Insurance Articles
Lending to Landlords: How does the market look?
01 Feb 2010
With the financial crisis still gripping the country, 2009 has not provided respite for those working in the property industry. Residential and commercial landlords alike are finding that the level of lending from financial institutions still hasn't bounced back.
The latest figures from Paragon Mortgages, a specialist in the buy to let market, reveal that nine out of ten landlords who tried to secure lending for a property in the three months before the end of August said it was more difficult to get finance than in the previous three months.
For years buy to let lending has gone largely unregulated. The Financial Services Authority (FSA) currently only oversees mortgages for properties where 40 per cent or more is occupied by either the borrower or a close family member. However a report was recently released suggesting this could be about to change and the FSA could begin regulating buy to let lending.
There have been mixed responses by those working in the property industry about what this could mean to both commercial landlords, residential buy to let owners and the market as a whole.
The Association of Residential Letting Agents (ARLA) said it was "unconvinced that the sector needs regulating". Ian Potter, operations manager of ARLA, added: "The FSA has to ensure that there is enough lending available for landlords to increase and maintain their stock, but ensure that tenants are not ultimately paying for the mistakes of the finance supply chain."
Meanwhile, the National Landlords Association (NLA) said that professional buy to let owners already know what they are doing with their properties and finance and do not need regulating. It added that it was concerned that the cost of this increased regulation would be passed on to landlords and that "focus should be about getting lenders lending once more".
This echoes Paragon Mortgages' report, which said that "buy to let product availability [has] continued to fall while the residential market has continued to improve". According to Moneyfacts, there were 196 live buy to let products available at the end of August, which is a 94 per cent reduction compared to the same period in 2007.
While ARLA and the NLA remain confident that the residential sector is doing well regulating itself, figures could suggest otherwise. The FSA report states that the number of buy to let investors who had properties repossessed has doubled since 2007, to 4,000 per year.
Although landlords seem to be against the proposals, the lending sector has welcomed them, suggesting it may have a different view about how the market is faring.
The British Property Federation (BPF) is leading the charge for tougher regulation. Ian Fletcher, BPF director of policy, said: "Many lenders simply threw money at buy to let borrowers during the boom without sufficient checks on who they were lending to or what they were lending for."
He argued that the reckless lending which took place before the economic crisis damaged both landlords and tenants and that it is vital that they learn from their mistakes.
The Council of Mortgage Lenders (CML) offered a similar sentiment, saying it welcomes the FSA's discussion paper. Michael Coogan, CML director general, said the market needed "clearly delineated responsibilities, which remove regulatory ambivalence, help lenders, intermediaries and consumers to know where they stand and accept the consequences of their actions".
In the early noughties, the buy to let market grew exponentially with the increased public interest in property development and booming house prices. Figures from the FSA show that in 1999 there were 3.1 billion buy to let mortgages approved, whereas just nine years later in 2007 the number had reached 44.6 billion.
More recently, the rise of the reluctant landlord has again left the residential letting market with a surplus of properties. These so-called 'accidental' landlords originally invested in property to make a profit but were unable to sell it and therefore opted to rent it out.
The prevalence of this type of landlord means that now most of the growth in the buy to let market is from those with very small portfolios. These landlords' limited knowledge of the industry is one factor which prompted the calls for regulation.
There are still a lot of conflicting facts which make it difficult to gauge how the market is doing. The latest numbers from the Find a Property index show that last month the amount of unoccupied rental stock dropped sharply and properties on the firm's website were let two weeks faster than they were in January 2009. However, these properties may still not be renting at their true value as figures from Business Development Research Consultants (BDRC) reveal that a quarter of UK private landlords break even at best.
Reports from the commercial sector suggest that business is still slow. In the Royal Institution of Chartered Surveyors' (RICS') commercial market survey for quarter three it was shown that while tenant demand for commercial property was rising, so was the level of availability. It reported that lettings activity for quarter three increased for business property for the first time in two years, but is still not back to pre-recession levels.
Worryingly, the level of development start-ups was very low, suggesting a lack of available funding for projects. The RICS survey revealed that in London, retail development starts were down 60 per cent and industrial development starts declined 54 per cent on the previous year. This figure was even larger in some areas, such as the West Midlands, where industrial development starts were down 86 per cent and retail starts were down 75 per cent.
At the beginning of the year, the outlook was particularly bleak, with UK commercial rents falling to their lowest level in 16 years. However, more recently they have shown signs of improvement. At the end of October, Malcolm Frodsham, head of research for real estate analysts IPD, said that the UK was attracting foreign investment and "commercial real estate has moved back into the black".
There is a general consensus among those in the commercial lettings industry that the recent poor performance is down to a lack of lending from the finance industry.
David Perrin from estate agents Nock Deighton said: "While residential market appears to be on the road to recovery the commercial market is taking longer and we are not yet seeing 'green shoots'. There is little activity due to a lack of available funding."
These comments were echoed by Barry Crux from Barry Crux and Company, chartered surveyors who specialise in commercial property. He said: "Sales of property are difficult due to the general reluctance amongst most banks to lend money, even to established customers on business."
It would seem that those in the commercial market believe that until financing picks up, the industry won't improve and there could still be some tough times ahead.
