Commercial Insurance Articles
Positive signs for private rental sector, but exercise caution
01 Feb 2010
There is growing positivity in the buy to let market, with various pieces of research showing increased confidence among landlords and growing property portfolios.
However, commentators are still issuing words of caution to investors as the recession rolls on.
Paragon Mortgages' quarterly Private Rented Sector Trends report showed that landlords expect the net value of their property portfolios to increase over the next 12 months, which is the first time they have given a positive prediction for over a year.
They have also been taking advantage of declining house prices since the first quarter of 2007 to add to their portfolios, although in small numbers.
Paragon's report showed that landlords owned an average of 11 properties at the beginning of 2007, but had 12 in their portfolio by the third quarter of this year.
In addition, 93 per cent of buy to let owners plan to retain their investment property in the final three months of the year, while 14 per cent intend to add to their portfolio. Just 5.7 per cent said they are planning to sell property during the period.
Average yields, which represent the annual rental income as a percentage of the current market value of the property, were reported at six per cent for the three-month period between July and September.
The research found that a third of landlords believe tenant demand will grow over the next year, while 57 per cent predicted that it would be stable. One in ten landlords expects demand to decrease over the next 12 months.
Paragon itself predicted that tenant demand would continue to be strong going forward as house purchase approvals are still at historic lows and mortgage supply remains weak.
"Demand for privately-rented property will grow significantly over the coming years due to the widening gap between those that can afford to purchase property and those eligible for social housing," said Nigel Terrington, chief executive of Paragon Group.
The private rental sector is benefitting from many people being unwilling or unable to purchase property, he explained.
"It is unlikely that the mainstream mortgage market will recover for a number of years and vast sectors of the population, such as first-time buyers and people with impaired credit history, continue to be excluded from the market," Mr Terrington continued.
Studies from the Association of Residential Letting Agents (ARLA) and the Royal Institution of Chartered Surveyors (RICS) have backed up the findings in the Paragon report.
According to ARLA's survey of its members, the number of properties in the average landlord's portfolio has risen from 6.3 to seven in less than a year, ending a trend for downsizing which began at the start of 2008.
"Low interest rates and proportionately higher rental yields are making the buy to let market attractive again to experienced investors," said Ian Potter, operations manager at the organisation.
However, he issued a word of caution to would-be buyers.
"There is a huge potential for investment at present, but take heed from the number of buy to let repossessions that this recession has seen and only borrow what you can realistically manage," he advised.
Meanwhile, RICS' survey of its members found that a net balance of two per cent of surveyors reported a rise rather than a fall in the number of buy to let investors enquiring after houses and flats.
Interest was generally stronger for houses than flats, except in London, where eight per cent more surveyors reported higher demand for apartments. RICS said that this most likely reflected the different nature of the private rental market in the capital and the price and availability of houses in this part of the country.
"The firmer tone to the market has also rekindled enquiries from buy to let investors albeit in a more measured way than was visible prior to the onset of the credit crunch," said Simon Rubinsohn, chief economist at RICS.
Lee Grandin, director of Landlord Mortgages, insisted that the findings did not mean flats are unpopular with buy to let investors.
"I would say that maybe it's more the case that lenders are restricting lending on new-build flats," he suggested. The fact that they usually require a significant deposit is having an impact on the number of new flats coming onto the market.
"Flats generally are very good let-able units because they are at the lower end of the market, which is what letting is all about," Mr Grandin explained.
"I think that it is just because the lenders have [been] significantly burnt lending on over-priced new-build properties, which happen to be flats," he continued.
There remain various factors which could impact upon the private rental market in a negative way. The National Landlords Association recently reported that almost three-quarters of buy to let owners have experienced rental arrears.
ARLA confirmed its own research revealed that 28 per cent of landlords had seen an increase in the number of tenants struggling to meet rental payments in the third quarter of the year, although this was down on the previous three months, when 32 per cent experienced a rise in arrears.
The organisation's Mr Potter stated: "Rental arrears are more common during a recession as redundancies occur and tenants' financial stability changes."
"With the private rented sector continuing to grow, it is important that those tenants struggling to meet payments are supported," he added.
Paragon's findings also suggested that the government's proposed national register of landlords could put a dampener on the market. Over half of respondents to the survey believe the introduction of the register would deter buy to let owners from making further investments in the private rental sector.
More worryingly, 57 per cent think the register would force some landlords out of the market because of the increased regulatory burden, while 48 per cent do not believe it would help raise standards.
The Financial Services Authority's recommendations surrounding regulation of lending to landlords could also prove an issue going forward, according to Paragon.
"We look forward to seeing the HM Treasury's proposals in more detail, but regulators need to appreciate the fundamental importance of a healthy buy to let market to a growing private rented sector and the factors that drive lenders' performance in the buy to let sector," the organisation's Mr Terrington concluded.
