Newsletter May 2005

RICS – Commercial market survey quarter 1 2005

Demand for business premises rose for the sixth consecutive quarter despite a lacklustre retail sector, says a report by the Royal Institution of Chartered Surveyors (RICS) published today (28 April).

The steady increase in demand has led chartered surveyors working in commercial property to upgrade their expectations of rent rises to the highest in four years. 13% more chartered surveyors expect rents to rise than fall, up from 9% in quarter four last year.

Levels of vacant business space dropped back at their fastest rate since late 2000, returning some bargaining power to landlords. The value of inducements offered by surveyors to secure tenants also fell for the first time in four years but the current market still favours occupiers.

There is continued growth in the office sector and strong distribution activity is underpinning demand in the industrial property market. However, a slowdown in consumer spending has squeezed retailers’ margins, reflected by a number of high profile recent retail failures.

RICS vice president, Graham Chase, said:
‘There is a change in the power base in the high street. The current market is one which exposes poor retail practice but allows those at the cutting edge to gain market share.

‘This is encouraging news for investors who have entered the market in recent years.  However, the outlook for the commercial property market is for steady financial returns over the next two years rather than the heady price appreciation of 2004.’

ARLA – DTI takes action over Buy to Let advisory companies

The winding up by the Department of Trade and Industry of a string of Buy to Let advisory and investment services has been welcomed by the Association of Residential Letting Agents, ARLA.

The DTI announced yesterday that it had taken action in the High Court to have these companies wound up in the public interest. Two of the companies offered to help investors build £1 million property investment portfolios while others operated £6,000 courses to teach investors how to acquire Buy to Let properties without payment of deposits.

"ARLA has been campaigning against companies and services such as these since they first made an impact on the Buy to Let sector more than two years ago," said Adrian Turner, Chief Executive of ARLA.

"We have has extensive help from the media and campaigning groups such as Which? We also ran a series of Buy to Let Masterclasses for investors last year in bid to counter the whole industry of false promises."

In addition to the detailed information available on the ARLA website, the links to the panel of mortgage lenders and the information available free from the 1,500 ARLA member letting offices throughout the country, ARLA and the Council of Mortgage Lenders jointly publish the ARLA/CML Buy to Let Guide each year.

"We can only hope that news of the DTI action gets around fast so that no more people are promised the earth at exhorbitant prices but make informed decisions based on professional advice which is available to them free," added Adrian Turner.

PIFs won't affect buy-to-let, and buy-to-let investors plan to stay - two new reports from the CML

If the UK introduces property investment funds (PIFs), they would add value to the property market by making it more flexible and diversified, according to the first of two new reports commissioned by the Council of Mortgage Lenders. However, PIFs would be unlikely to have much effect on buy-to-let, as they are likely to operate in different segments of the market.

The authors of the report point out that US REITs (real estate investment trusts), on which the proposed PIF model is based, are primarily concerned with commercial property, and that REITs make up less than 1% of the US private rental sector. They suggest that, in the UK, PIFs might account for 2-4% at most of the private rented sector. But they see PIFs as potentially serving particular niche areas such as affluent professionals, key workers/students, urban regeneration and new build, and affordable housing.

From the point of view of investors, the authors again see PIFs as appealing to a different group of people than buy-to-let landlords.

They are more suitable for passive investors looking for professionally-managed, large, diversified portfolio investment opportunities. The authors expect that perhaps half the larger listed UK property firms and a quarter of smaller firms might convert to PIFs provided the transfer fee was not prohibitive, and that there could be about £10-£20 billion of PIF activity in the first 3-5 years.

The other report published by the CML is an analysis of the profile and intentions of buy-to-let investors, based on a survey of 1,340 landlords. The survey found that about a quarter of these had only one rental property, while about the same proportion owned three to five properties. Less than 2% owned more than 50 properties, and the median number owned was four.

Around two-thirds of buy-to-let landlords had another job or relied mainly on other income, but 20% derived a significant amount of their income from their buy-to-let portfolio and for 11% it was their main job or source of income. "Professional" landlords (defined here as those who receive rental income equal to at least the national average income, and who can live off their income without selling properties to release capital gains) accounted for around a fifth of the total. They have portfolios worth at least £1 million typically made up of 6-20 properties.

At least half of landlords had mortgages on all their properties. Most had mortgages representing 26-75% of their mortgaged portfolio. Less than one per cent had a loan-to-value ratio of over 90%. The vast majority of landlords have interest-only rather than repayment mortgages.

Looking ahead, fewer than 6% of landlords said they planned to reduce their portfolio or leave the market over the next six months, while 38% said they planned to increase their portfolios. Over 60% said they expect to stay in the residential rental market for more than ten years. The main things that would encourage landlords to buy were low interest rates, rising house prices and very good rental yields. The main things that would make them sell were rising interest rates and rental income that did not cover the mortgage - these were more likely than stagnant house prices to prompt landlords to sell.

Commenting on the two new reports, CML Senior Policy Adviser Andrew Heywood said:
"Taken together, these two reports outline a stable future for the buy-to-let sector, and the possibility of modest improvements to some segments of the rental market if PIFs are introduced. Buy-to-let is maturing, with landlords becoming more experienced and professional, and is making an important contribution to the private rented sector as a whole."