Newsletter February 2006Buy to Let investors look for 15 year nest-egg While most buy to let landlords invest in residential property for the long term, only five percent invest solely for the rental income. Instead, over half of all investor landlords are looking to create a nest egg for themselves some 15 years ahead. The remainder look for a mixture of income and capital gain.
Nearly two thirds of the investor landlords questioned in the Association of Residential Letting Agents’ review of index and investor profiles said that they expect to enlarge the size of their portfolios during 2006. This report for the final quarter of 2005 was the second consecutive quarter to show this upward trend and it reverses the marginal decline seen between June 2004 and June 2005.
Adrian Turner, chief executive of ARLA said, "It is notable that the upward trend began well before last month when the chancellor killed off residential investment using self invested pension plans. It shows that buy-to-let remains highly regarded as a stand alone investment."
Nine out of ten (89%) of landlords questioned said they would not sell their investment properties should house prices fall. On average, they expect to hold their properties for over fifteen years.
The ARLA buy-to-let index for the fourth quarter 2005 for cash purchases stood at 100.5 (100.4 in the third quarter) and for a geared investment the index at 98.1 (97.9). Base 100 was set for the third quarter 2002.
The ARLA index and the agent and landlord surveys are supported by the ARLA panel of Mortgage Lenders, Birmingham Midshires, GMAC Residential Funding, NatWest Mortgage Services, Paragon Mortgages and The Mortgage Business.
The surveys show that tenants are staying in rental property for an average of 16.8 months. Commented Adrian Turner, "This utterly refutes reports that the structure of the private rented sector makes for short tenancies. It is obvious that through buy-to-let, tenants are staying for a comfortable period. It is an example of how professional agents and buy-to-let landlords have transformed renting to such a degree that it has become socially acceptable and the first choice of many."
Returns on a cash purchase of a property investment over a five-year period stand at 11.3% a year. On a geared investment, assuming a 75% buy-to-let mortgage, returns average 22.74%. Five years is taken as the minimum period for which it would be viable to make a buy-to-let investment given the purchase and setting up costs.
The lowest average returns in the whole country are reported for the South West at 10.66% for a cash purchase and 21.27% for a geared investment. The highest returns of all are to be found in Scotland, Wales and Northern Ireland, at 11.83% for a cash purchase and 24.25% for geared investments. The highest returns in England are found in the North East with 11.42% for cash purchases and 23.23%, geared investment.
The latest survey shows that it is becoming more common for landlords to own properties away from the areas where they live. Comparing the distribution of properties with the distribution of landlords shows a higher proportion of landlords saying they have properties in the Midlands and North of England than actually live there - 50% of properties against 33% resident.
This sort of ratio applies to a lesser extent to other areas and the survey shows that some landlords own properties in more than one region.
The survey also demonstrated that awareness of tenancy deposit schemes is increasing among Buy to Let landlords, although nearly half have yet to take the time to assimilate the details. December mortgage lending ‘strongest on record’ Gross mortgage lending fell by 6% in December to an estimated £26.3 billion according to the latest data from the Council of Mortgage Lenders.
However, this was 25% stronger than the £21 billion achieved in December 2004 and is the strongest figure for December on record. The figures also show that gross lending in 2005 totalled £287.5 billion, down by only 1% on the record £291.2 billion in 2004.
Lending typically declines towards the end of the year, but the fall in December was less than in previous years.
Commenting on today's figures, CML director general Michael Coogan said: "The commentators who thought lending would fall sharply in 2005 based on the performance of the first half of the year were wrong."
"Confidence in the housing market was supported by the realisation that short-term interest rates had peaked and the downward trend in fixed-term rates throughout much of the year, resulting in stable house prices."
"The second half of 2005 was characterised by strengthening housing market activity and increased mortgage lending. We expect this trend to continue into 2006 as mortgage approvals continue to rise. Against this background, house prices should remain resilient in the coming months."
The British Bankers' Association also released lending figures today saying that underlying mortgage lending in December rose by an underlying £5.4bn; the strongest rise since June 2004, a little higher than November's rise of +£5.2bn and well up on the average of +£4.6bn over the previous six months.
"Mortgage lending strengthened in the final months of the year, but in sharp contrast, unsecured lending continued to be noticeably subdued," said BBA director of statistics David Dooks. Buy to Let pays for better lifestyle According to new research by Standard Life Bank, one in five landlords use their rental income to improve their overall quality of life.
In a recent survey, Standard Life questioned over 500 landlords across the UK about their earnings from buy-to-let properties. The results showed that these investments can often be very lucrative.
"Our survey revealed that a quarter of all respondents are earning up to £200 more than their mortgage commitments every month, 27 per cent are earning between £200 and £500 extra, and 13 per cent are earning up to £1,000 each month," said Andrew Boddie, Head of Marketing at Standard Life Bank.
Although the results show the majority of people (52 per cent) first became landlords in order to invest in their future, Standard Life is predicting an increased trend in "buy-to-let-to-lifestyle" as people start to cotton on to the earning potential that buy-to-let can deliver.
"Earnings on successful buy-to-let projects can be significant and provide landlords with income to change their lives - and with one in five already reporting that they benefiting in this way, we expect to see this number rise as more people use their property to embrace a more flexible lifestyle," Mr Boddie stated.
17 per cent of respondents used the money earned from their property to go travelling, 10 per cent used their earnings to reduce their working hours and work part-time, while 10 per cent used the money to retrain or set up their own business.
According to a recent ARLA Review, 57 per cent of buy-to-let landlords currently own just one other property in addition to their own home and 23 per cent own two or more properties. Significantly, around three per cent of respondents now own more than ten houses, with many investors finding that money from buy-to-let projects can be sensibly reinvested in expanding a existing portfolio.
Home buyers confident for 2006 market
Homebuyers are putting their confidence in the UK housing market this year, with almost 80% expecting average UK house prices to rise over 2006 and only 15% expecting a fall in the average cost of a property, according to a survey carried out by The Homebuyer Show.
These figures show a distinct change in expectation from last year when only a quarter expected the market to grow whilst almost half thought 2005 would see a decline in property prices. These upbeat results are also reflected in the predictions of the house price reports from Nationwide, Halifax and Hometrack which predict moderate growth in house prices this year.
Almost two thirds of those questioned stated that they were planning on buying a property in the next 12 months, with half of these planning on buying an investment or buy-to-let property. However homeowners remain cautious about the rising house prices, stating it at as their third biggest worry after a lack of affordable housing and a change in interest rates.
Nick Clark, Manager Director of The Homebuyer Show, comments: "The UK housing market seemed to really struggle throughout 2005 with prices and activity down. However with the realisation that a house price crash was highly unlikely, the market has begun to show signs of positive growth and both buyers and sellers are returning to the marketplace. Speculation of a reduction in interest rates should see a further boost in activity which should cause house price inflation over the whole of the UK."
Favoured hotspots for buyers include London, especially the East of the city around the proposed Olympics sites, the North West of England and the South East including Kent and the Thames Gateway, earmarked by the Government for extensive house building work.
The Homebuyer Show will be held over Friday 17 March (10am to 6pm), Saturday 18 March (10am to 5pm) and Sunday 19 March (10am to 4pm) at the ExCeL Centre in London's Docklands. Entry to the Show will be free but with an additional admission charge for seminars and debates. Brokers tip property over shares Britons would be better advised to invest in property than shares over the next five years, according to a recent survey of UCB Home Loans brokers.
523 mortgage brokers were surveyed by UCB Home Loans, a subsidiary of the Nationwide Building Society. The results showed that 55 per cent of respondents considered buying property to be more profitable than investing in equities.
This is despite the fact that the Nationwide's own figures suggest that the FTSE 100 share price index grew by 16 percent at the end of last month in comparison to the housing market's three per cent growth over the same period.
UCB Home Loans managing director Keith Astill said that this was an exception, not the rule.
He explained: "Last year was the first year this century that growth in the equity market has outperformed the housing market and it was also the first time in five years that annual house price inflation has been in single digits at the end of the year."
He went on: "The longer-term picture on prices is less clear, but the research shows that brokers are obviously expecting property to outperform equities over the next five years.
This prediction is reinforced by the fact that whilst the FTSE 100 is only ten per cent above its 1999 level, house prices have more than doubled over the same period.
"Nationwide's December housing review showed that the average UK house price currently stands at £157,250 and the average price for first time buyers is £128,105. Fifteen years ago, the average UK house price was just £54,313 some £102,937 lower than it is today", said Astill. Investors drive development Demand for office property saw the biggest increase in nine months signalling a recovery in the sector and leaving stagnant retail and industrial markets trailing says RICS.
Office lease lengths, which have continued to fall since the dot com crash of 2001, are no longer in decline. Inducements employed by landlords to entice potential tenants, such as rent-free periods and help with fit out costs, have levelled out.
Rents in the sector are expected to increase, with confidence at its highest in four years.
However, in a beleaguered retail sector, inducements rose further after a prolonged lull in consumer spending and lower tenant demand.
The run-up to the Christmas period saw an upturn in consumer spending, but this has had no significant impact on demand for retail space. Enquiries have fallen at their sharpest rate in four years over the last quarter.
Despite this, development continues apace, with the biggest increase in three years for office building project starts reported. Here, sharply rising commercial property values have been encouraging developers to take more risks.
Investors are showing a continued willingness to buy new commercial space, especially prime location, investment grade properties.
Good returns are keeping investors interested. Overall, commercial property capital values grew 12.2% last year and 11.6% in 2004, due to rising foreign investor and pension fund demand.
Further investment in the sector is expected in the run up to 6 April when the rules change for including commercial property in a Self Invested Personal Pensions (SIPPs). 2007 will see further interest with the advent of UK Real Estate Investment Trusts (REITS).
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