Newsletter January 2006

Buy-to-let lending soared prior to Sipp snub

Buy-to-let mortgages increased by a massive 16% in November, according to lender Mortgages Direct, the financial subsidiary of Spicerhaart.
The rise followed a steady increase over the past six months as many investors were gearing themselves up for the tax-free residential property investment opportunities in SIPPs. This has now been snubbed out by the government, as the chancellor scraped the tax break in early December 2005.
Peter Gladdy, director of Mortgages Direct commented: "The original proposed changes to SIPPs, where residential property was to become a valid SIPPs investment had already boosted the number of buy to let mortgages, as investors were realising the opportunities to boost their pension funds."
"The government’s u-turn on SIPPs in the pre budget report is clearly bad news for pension holders who were planning on feathering their retirement nest with tax-free residential property."
"However the renting market is fairly buoyant in this current climate, with many potential homeowners sitting on their hands, waiting to see which way prices will go and therefore opting to rent instead. Landlords are responding proactively to the demand and to the upward trend of rents. The established investor, who takes a long term, professional approach to buy-to-let will continue to buy selectively and carefully."
With the Bank of England refusing to drop the base rate any further in December, borrowers are continuing to feel the squeeze. The number of borrowers opting for interest only repayments has increased to 39% from 26% in November 2005.
"It is surprising that more borrowers are opting for interest only repayment. This is not advisable unless a comprehensive repayment method is in place," said Gladdy. "Borrowers are evidently still feeling the squeeze on their finances. The Bank of England has clearly missed the chance to provide the much needed boost to the consumer and homebuyer’s confidence over the Christmas period."

Landlords see ‘element of opportunism’

Figures released this week by Paragon Mortgages show rental yields stabilising, and an element of opportunism as landlords pick up properties at attractive prices.  Yields generated by residential property investors have been relatively stable over the past quarter, remaining steady at around 6.5% since July.  John Heron, managing director of Paragon Mortgages, said: "Yields seem to have stabilised in the past quarter, after some easing earlier in the year. This is clearly good news for landlords with existing property investments or who are considering increasing the size of their portfolios."
"From recent research, we know that established landlords plan to grow their property holdings by around 5% over the next 12 months."
The average price at which landlords purchased investment properties continued to edge down in October, to £156,879, with rental incomes following a similar downward trend, easing from £10,835 in July to £10,152 in October.
John Heron continued: "There’s clearly an element of opportunism as landlords pick up properties at attractive prices."
"In our experience, tenant demand is strongest for smaller properties which offer simple but decent accommodation at a reasonable cost. Thus it’s no surprise that the astute landlord will often prefer to buy basic homes at the lower end of the price spectrum. Clearly they’ve been doing some good deals recently which has brought average prices down to some extent."
This month, the highest yielding regions in the country are East Anglia (7.1%) and the South West (7.0%), knocking Yorkshire and Wales off the top two spots.
"Earlier this year," said John Heron, "we recorded the highest yields in northern regions of the country – the North, North West, Yorkshire and East Midlands were consistently among the top performers. Now those regions have been overtaken by more southerly parts of the country such as East Anglia and the South West."
Yields in London continue to lag behind the national average, reflecting the much higher level of property prices.
However, over the past few months, there has been a gradual rise in yields in the capital, from 5.8% in August to 5.9% in October.
"Landlords in Greater London should take heart from the firming of yields, which have been following this favourable trend since the summer," commented John Heron.
The average total return generated by landlords this month stood at 12.0% across the country. In terms of regional differences, Wales took over from Yorkshire this month as the region offering the highest overall annual return to the average landlord (based on capital appreciation plus annual rental income on a property purchased in October 2004). Total return in Wales was 32.6%, compared with 30.3% in Yorkshire, 26.5% in the North and 24.9% in the North West.
In October, yields on terraced properties averaged 7.0%, while semi-detached stood at 6.7% and detached at 6.2%. Flats trailed behind at 5.6%.  "With buy-to-let driven by demand and the terraced home typically the most popular among tenants, it is to be expected that terraced homes will consistently outperform other types of property in terms of yield. The perennially popular terrace, at £135,745, is also the cheapest type of property. Recently, we have seen landlords making property acquisitions at attractive prices in response to growing tenant demand for this type of home," said John Heron.

Lower rent versus empty weeks

With renting a popular option for many, rents in the UK - and the South East in particular - remain strong.
However, one of the UK’s largest independent letting specialists is warning landlords to be realistic when setting the rent for their property.
Signing up with an agent just because they value their property at a high rent could mean landlords finding themselves with unrented property for long periods.
Leaders’ managing director, Paul Weller said: "Whilst the agent’s role is to ensure the best possible rent is obtained for the property, it is essential to be realistic when setting the rent so that a let is achieved quickly and the asking price is not too high for the current market."
"Landlords should take the advice of an independent letting agent who has longstanding experience of the local market, and not rely on a rental valuation from the agent who is selling them the property, as this is when we most commonly see unrealistic valuations."
Leaders warn that if landlords ask for an unrealistically high rent, they could find themselves with an empty property for a number of weeks or months, which would lose them more rental income over the year than they would lose by simply dropping the rent by £25 or £50 per month.
According to Leaders, tenants are willing to pay good rents for the right properties: those that are presented well, with good quality décor, fixtures and fittings, and in good locations.
However, in certain markets the best rent achievable can sometimes be lower than a landlord might have hoped for, and it may become necessary to accept a slightly lower rent, which landlords are often, understandably, reluctant to do. But Leaders’ say that in their experience, the loss in rent through a small rent reduction is often minimal when compared with how much would be lost as a result of the property remaining empty for a few weeks. Therefore reducing the rent is sometimes the best course of action to minimise losses.

Mood swing for buy-to-let investors

Achievable rent levels in the private rented sector have increased in both prime central London and throughout the country away from the South East, said the Association of Residential Letting Agents in their fourth quarter survey.
The return on residential property investment has stayed static at 4.9% for houses and 5.1% for flats. However this appears to be satisfactory for buy-to-let investors, as a mood swing has become apparent with significantly more investment landlords buying rather than reducing their property holdings.
Up to 35% of the ARLA member letting agents responding to the survey believe that rents have risen substantially.
Average weekly rents for houses in prime central London are now £655 and for flats £406. In the rest of London, the rent for a house averages £266 and £261 for a flat. This compares with a rental of £175 a week for a house in the Midlands and £112 for a flat. Outside London and the Home Counties, the northwest of England achieves the highest rents, with £200 a week for a house and £157 for a flat. In Scotland, the average rent for a house is £168 a week and £129 for a flat.
The balance of property supply and tenant demand has improved in prime central London. This has narrowed the gap between London and the rest of the country, where the proportion of letting agents saying there are more properties than tenants has increased slightly.
However, the proportion saying that there are still more properties than tenants is still at a historically low level.  The figure has fallen from a high of 66% three years ago to just 45% for this quarter.
Commenting on the latest quarter's results, ARLA chief executive Adrian Turner said, "This is continuing evidence that the private rented sector continues to be an attractive proposition for investor landlords and that it is the most stable sector of the housing market."
"This is underpinned by the fact that renting is socially acceptable for many for a variety of different reasons making it likely that industry forecasts of growth in renting from 11% to 15% of all housing are likely to prove accurate."
Meanwhile, more than three quarters of ARLA's member letting agents believe that landlords are still marking time over increasing their net investment in residential property. However, the last quarter has shown a significant increase in agents who believe that landlord investors are on the move again.
Compared to the previous quarter, there has been a marked upturn in the number who believe that investors are buying more, up from 10% to 15%. There is also a corresponding fall in the numbers who say that landlords are selling. This is down from 12% to 7%. This suggests a significant mood swing as the net position has moved from 11% of landlords selling to 8% buying.