Newsletter January 2005

Business Property Chronicle

• Property Interest Rate Report
• New CML survey explodes buy-to-let myths
• Paragon Mortgages - Investment portfolios grow by a third in just 4 years
• Halifax - House Price Index December 2004
• ARLA - Buy to Let Investors display optimism for the year ahead
• RICS - Economic brief January 2005
• Paragon mortgages - Landlords remain confident for 2005 as demand for rented property increases
• RICS - New Rural land market emerges

Property Interest Rate Report

New CML survey explodes buy-to-let myths

The survey sought to establish what might cause buy-to-let landlords to increase or decrease their level of property holdings. The main factors that would prompt landlords to decrease their buy-to-let portfolios were rents being insufficient to cover the mortgage (cited by 49%) and rising interest rates (cited by 47%). Stagnating or falling prices were not seen as a significant deterrent, being respectively cited by only 6% and 14% of landlords. The main factors that would encourage buy-to-let landlords to expand their portfolio were stable, low interest rates (cited by 56%), steady or rising house prices (46%) and good rental yields (44%).

In addition to buy-to-let mortgages, the survey asked landlords what other sources of finance they had used to acquire their properties. Savings were the most popular additional source of finance, cited by 58% of landlords. 43% had remortgaged their portfolio to free up funds for acquisitions, while 33% had remortgaged their home. 17% had used house sale proceeds and 16% had used an inheritance or other windfall, while 14% had taken a bank loan.

When asked what they planned to do over the next 12 months, 38% of landlords said they planned to increase their portfolio and 48% said they planned to maintain their current level. Only 5% said they planned to decrease their buy-to-let holdings, 1% said they planned to leave the market and 8% did not know.

In terms of how long they expect to remain in the private rental market, almost two thirds (63%) anticipate being landlords for more than ten years. Another fifth (21%) expect to remain in the market for 6-10 years and 14% for 1-5 years.

The CML will be commissioning more detailed analysis of the survey data to help provide more detailed information to the market on the characteristics and motivations of buy-to-let landlords, and expects to publish this in the early part of 2005.

Commenting on the topline results, CML Head of Research Bob Pannell said:
"Up to now, the future intentions of buy-to-let landlords have been the subject of much conjecture but little real evidence. The topline survey evidence sets down a clear marker that landlords themselves broadly expect to maintain or increase their holdings, have a long-term interest in rental property, and are unlikely to be spooked by the prospect of a slower market."

Growth in portfolios
The number of properties in the typical landlord’s portfolio has risen by almost a third in 4 years, according to Paragon Mortgages’ landlord survey for the third quarter 2004. The average investor, who owned 9.8 properties in 2000, now owns 12.8, an increase of 3 properties or 31% in 4 years.

John Heron, managing director of Paragon Mortgages explains: “Landlords have ridden the wave of growing tenant demand for rented homes, and have progressively built up significantly larger portfolios in response to this demand. As home ownership has become more of a stretch for many prospective first time buyers, many of them have tended to stay in rented accommodation for longer.”

“A recent survey we undertook showed that people are leaving home younger than they used to, at 20 years as compared with 22 years for earlier generations, but fewer than 1 in 5 of the 18-24 age bracket buys their own property immediately on leaving home. In contrast, a third of people now in their mid forties to mid fifties were able to buy straight away. In fact, the proportion of people who succeed in buying their own home by age 30 has dwindled from 68% to 60%. Renting fills the housing gap, and a massive 68% of British people live in rented homes at some point in their lives.”

“As their property portfolios become bigger, landlords benefit from the economies of scale and adopt a more ‘professional’ approach to buy-to-let as a business. As their residential lettings business grows, it also becomes the main source of income for many landlords.”

Almost 4 in 10 landlords (36%) now own more than 10 investment properties, compared with less than 1 in 4 (23%) 4 years ago. In percentage terms, growth in large portfolios of 10 properties or more has been very strong: the proportion of landlords owning between 11 and 20 properties is up 64%; between 20 and 50 properties up 56%; and more than 50 properties up 39%.
Over the same period, there has been a decline in the proportion of landlords owning smaller portfolios of between 2 and 10 properties, of 27%. Landlords owning just one rental property have jumped, however.

“This growth in the average size of buy-to-let portfolios reflects the fact that the bulk of this country’s rented accommodation is in the hands of serious property investors who treat this as a long term business and who buy in response to clearly identified tenant demand. They are quite unlike the small-scale speculators who are often short-termist in outlook and tend to buy and sell based on short term, emotive market signals such as house prices or interest rates”, comments John Heron.

Age and characteristics of tenants
Landlords reported that three quarters of tenants are aged 35 or less. Over a third (34%) of their tenants are under 25 and a whopping 41% are aged between 26 and 35 years. The proportion of tenants who are older tails off progressively, with only 17% between 36 and 45, and 8% between 46 and 55. The over 56s represent a very small percentage, of little more than 5% in total.

John Heron adds: “It’s no surprise that tenants are mainly from younger age groups. However, the ‘bulge’ of 25 to 35 year olds reflects the difficulties encountered by people in their late 20s and early 30s to get on the housing ladder, so they are forced to rent homes for longer. What has changed over recent years is that there is no longer any social ‘stigma’ in living in rented homes. Landlords provide good, decent accommodation at a fair price where tenants are happy to live for as long as it suits their personal circumstances, or until they can afford to buy a home.”

The vast majority of tenants are employed, accounting for 72% of the total, while students represent the next biggest category, accounting for just 19%. Almost as many (17%) are people receiving DSS support. Looking at the typical occupations of employed tenants, nearly half (45%) are either skilled non-manual or clerical workers, while well over a third (36%) have professional or managerial roles. The remaining 19% comprise mainly manual workers.

Continues John Heron: “The survey confirms that rented homes are the favoured accommodation choice of young people who do skilled or professional non-manual or clerical work. The bread and butter business for most buy-to-let landlords is providing decent, affordable accommodation for office workers. Student lettings represent an important niche for some landlords, representing almost a fifth of business, while DSS recipients are also a significant minority.”

In terms of personal status, more than 8 out of 10 tenants are either singles or couples, with families representing less than 1 in 5. Homes in multiple occupation (shared by a number of tenants) comprise almost a third of rented properties.

John Heron concludes: “The survey paints a clear picture of the typical tenant, who is most likely to be under 35, living as a single or a couple, but without children, and an office worker. Over the past few years, landlords have successfully grown their property investment businesses by responding to the demands of this growing customer base. It’s by meeting the demands of tenants, their customers in the market place, that landlords have been able to grow the size of their portfolios so strongly over the 4 years.”

· House prices increased by 15.1% in 2004, but by only 2.8% in the second half, with the annual rise last year the smallest since 2001 when prices rose by 11.7%. (2002: 26.4% and 2003: 15.4%.)

· The three northern English regions recorded the biggest price rises in Britain in Quarter 4: North West (3.0%), Yorkshire and the Humber (1.2%) and the North (0.7%). All other regions in Britain saw a fall in prices during the quarter with the biggest declines in Wales (-6.2%) and the South East (-1.6%). Prices in London fell by 0.5%: the second successive quarterly drop in the capital.

· There was a clear north/south divide in 2004. The biggest annual house price rises were in the North West (27%), the North (26%), Northern Ireland (24%) and Yorkshire and the Humber (22%). The smallest annual price gains were in Greater London (4%) and the South East (7%).

· The differential between the average house price in the south and its equivalent in the north has fallen by £15,000 from a record £99,000 in early 2003 to £84,000 at the end of 2004.

· Scotland is now the only region of the UK where the average price remains below £100,000 (£99,056). London remains the most expensive region with an average price of £241,670.

· Housing market fundamentals remain sound – a strong labour market, historically low interest rates and a shortage of housing supply – which should curb the extent of the downturn in the housing market and result in only a 2% fall in house prices this year.

· The continuing signs of a genuine slowdown in the housing market are likely to reduce the pressures on the Bank of England to raise interest rates again. We believe that base rates have peaked at their current rate of 4.75% and that rates will end the year at 4.25%.

For the fourth quarter of 2004, Buy to Let returns stood at 11.23% on an outright cash purchase of an investment property and 22.43% on an investment geared through a mortgage.

The optimism displayed by investment landlords is evidenced despite ARLA letting agents reporting falling capital values everywhere during the last quarter, apart from prime central London. These falls were 7% for houses and 5% for flats in the South East and 11% and 8% for houses and flats respectively throughout the rest of the country. Prime central London bucked this trend with rises of 0.2% for houses and 0.3% for flats. The falls outside London reverse the rises reported in the previous quarter.

Clearly at odds with some commentators, these findings are reported in the ARLA Review and Index of Returns on Residential Investment for the fourth quarter of 2004 published today, 5th January 2005. Nearly 800 letting agents and individual private investors participate in the largest quarterly survey of Buy to Let investment and the private rented sector.

A third hold just one property, one in five have two properties and a significant minority hold more than ten investment properties. Overall, they expect to keep these investments for an average of 17 years.

Nearly half (44.6%) of all investors have invested to create a 'Nest Egg', while 47.8% invest for the combination of rent and capital appreciation. Only 5.5% have invested for income alone.

On average, investors have been in the Buy to Let market for more than four years. A fifth (21.7%) have held their investment properties for more than five years while just under a fifth (19%) have held investment property for less than a year. Getting on for half, (44.1%) have been investment landlords for between two and five years.

Commented Robert Jordan, President of ARLA, "A large proportion of experienced Buy to Let landlords are clearly at odds with some of the commentators. These real investors in the rental market understand both the long term nature of the investment and its resilience in the face of house price movements."

Actual rental returns reported by ARLA member letting agents are 5.0% for houses and 5.3% for flats. There is little regional variation. Houses in prime central London are producing returns of 4.6% gross and flats 5.0%. In the rest of the South East returns are 5.2% for houses and 5.4% for flats. In the rest of the country, returns averaged 5.1% for houses and 5.3% for flats.

Average rents achieved ranged from £30,600 a year for houses in prime central London to £ 5,300 for flats in Scotland and Wales.

Nearly a quarter (24%) of all ARLA agents report more tenants than there are properties. 26% believe supply and demand are in balance and 49% think there are more properties than tenants. Most agents also believe that investor landlords marked time on their investment decisions in the final quarter of 2004.

"This represents a healthy marketplace. Without oversupply we would have tenants queuing around the block and the government would be in a greater dilemma over housing than it is at present," said Robert Jordan. "Obviously there are some areas where oversupply is still uncomfortably high but even here it is significantly lower than a year ago."

Other results from the ARLA Review and Index show that the ARLA Buy to Let Index (set up with Base 100 in September 2002) stands at 100.5 for the outright cash purchase of a Buy to Let property and 96.7 for a geared investment.

The letting agents report void periods are unchanged at an average of 29 days a year. There was a small drop in the number of viewings needed to let a property, from 6.1 to 5.9 visits and a rise in the number of new tenancies, up from 33 to 35 per letting office.