Newsletter July 2006

Landlords continue to invest in the market

Property prices rose by nearly 2% in April as landlords continue to invest in the market, according to the latest Buy to Let index from specialist lender Paragon Mortgages.

Cancelling out the dip in March, the rise in April has contributed to a 4.7% house price increase over the past six months. Nationally, homes were 7.62% higher than in April 2005.

However, rising property prices are encouraging rather than deterring investors. John Heron, Paragon Mortgages' managing director, explained: "In all parts of the country, upbeat landlords are buying properties at higher prices, secure in the knowledge that there is good tenant demand out there for the right property in the right place."

"We are seeing good investor activity in many northern cities, as they purchase to meet the accommodation needs of all categories of tenant - students, key workers, families on benefit, and young professionals."

"For the most part, existing landlords are adding to their portfolios, and there are not so many first time landlords. It is perhaps no coincidence that real estate investment is popular at a time of uncertainty in the equity markets."

Average rental income rose by £31 (or 0.3%) from £10,082 in March to £10,113 in April, despite which, rental yields fell from 6.26% to 6.16%.

The latest figures indicate that rental figures have stabilised. April rents were at the same level as six months previously, October 2005.

Looking ahead, Mr Heron predicts a buoyant market as landlords continue to invest: "The positive trend looks set to continue - in our latest landlord survey, investors said that they expected to expand their portfolios in terms of both property numbers and value by 5.6% over the next 12 months."

Property Can't Steal Away in the Night

Conflicting reports about the state of the housing market have had no effect on Buy to Let investors. This is shown by the second quarter's survey - conducted last month from among the 10,000 subscriber landlords on the ARLA Buy to Let website - published today, 27 June 2006.

Nearly two thirds of all landlords expect to acquire further investment property in the next twelve months and even if house prices fall, nine out of ten will not sell. Instead, the expected lifespan of a buy to let investment is 16.2 years while the average age of investors is 46.

"We believe that investor landlords do their research and know and understand the investment market in residential property to rent. They also feel secure in the knowledge that their investment cannot steal away in the night," said Adrian Turner, Chief Executive of ARLA, announcing the latest quarterly survey results.

Meanwhile, the ARLA Index remains stable. It stands at 102 for outright cash purchases and 99.8 for a geared investment.

ARLA surveys and the ARLA Review & Index are published quarterly in conjunction with the ARLA Panel of Mortgage Lenders: Birmingham Midshires, GMAC Residential Funding, Mortgage Express, NatWest, Paragon Mortgages and The Mortgage Business. They are the largest surveys of their kind and they question over 800 letting agents and landlords.

A high proportion of these investment landlords have been active in the buy to let market since 2000. They hold an average of five properties, although this polarises between the 53% who have only one or two and the 10% who have more than 10 properties. These investors have been landlords for an average of just under six years with 15 percent having more than ten years' experience in the market.

Virtually half of all respondents say that they have invested in buy to let properties to create a nest egg. 43% look for rental yield as well as capital appreciation but only 6% have invested solely for the income. A negligible number, just 2.7%, invest for short term capital gain.

Investor landlords say that their tenants stay for an average of 17 months, regardless of the length of the initially agreed term. Only one in eight, 8.5%, found that tenants stayed for between six and nine months, which is probably the average length of an initial tenancy agreement.

Despite government advertising aimed at every landlord in the private rented sector to warn them to license Houses in Multiple Occupation, the great majority, more than 80%, believe they neither own nor manage properties which would create an HMO that might be subject to mandatory licensing.

Private rented sector ‘flourishing’

The asset value of rental property in London and the South East has continued to rise in contrast to falls reported in parts of the rest of the country. Rents have also risen in the south, but fallen elsewhere.

However, the results of the latest ARLA quarterly survey of member letting agents published 14th June, shows that average asset values and rents throughout the country provide a healthy investment climate in the private rented sector.

This healthy picture is reported as industry-wide fears are growing that the temptation to over-regulate coupled to empire-building in town halls could still impair the growth of the private rented sector

Despite this, the second quarter survey found that, over the last three months, ARLA member letting agents have each signed an average of nine landlords who are new to the rental market. At the same time, they lost three landlords who have either died, retired or left the market for other reasons.

10% of ARLA offices have acquired more than 20 landlords who were new to the rental market and more than half of all offices have taken on in excess of six novice landlords. The fewest number of landlords coming new to the market were to be found in prime central London and the highest numbers were to be found outside London and the South East.

Rises in the capital values are reinforced by the balance of supply and demand which is reported as showing that there are more tenants than there are available properties in London and the South East with the rest of the country close to equilibrium.

Overall, more than a third (36%) of letting agents say there are currently more tenants than properties. This compares to 34% who believe there are more properties than tenants and 29% who believe supply and demand is in balance. Demand is highest in prime central London.

ARLA chief executive, Adrian Turner said: "Again, we can report that the private rented sector is not only alive and well but flourishing."

"There is no reason for this not to continue provided that industry-wide fears that burdensome regulation and empire-building town halls do not interfere in the healthy growth of housing choice. This is particularly relevant at a time of so much discussion about the provision of housing options."

Nearly a third of all ARLA letting agents report landlords are buying more property. This is sharply up from the first quarter of 2006 when only 17% of respondents reported that landlords were active in the market.

The capital values of both houses and flats in the rental market have been subject to quarterly fluctuations. However, the overall weighted average shows a rise in value for rented houses of 0.3% and 2.7% for flats during the last three months.

The vast majority of tenancies (85%) are Assured Shorthold Tenancies. However, in prime central London a third of all tenancies fall outside the Housing Act. Instead, contractual agreements are drawn up by the letting agent, often following detailed negotiations between the parties.

On average, tenants remain in a property 15.8 months, staying longest in prime central London (nearly 18 months) and for 14.6 months outside the South East.

Commercial property opens its doors

Public interest in UK commercial property investment has soared in recent years and is expected to increase further according to the RICS annual UK commercial property forecast published today, (6 April).

Commercial property returns are continuing to attract individual private investors with total returns in 2005 remaining close to 20% for the second consecutive year.

Overseas investors have been the dominant force in the market in 2005, taking over from domestic institutional investors the previous year and accounting for £15bn or 30% of all purchases.

Buyers from the Middle East have been particularly active as rising oil revenues have increased spending power. UK institutional investment accounted for £11bn of all direct commercial purchases in 2005, though net investment receded to £2bn after peaking at £4bn in 2004.

2005 also saw the return of equities as the front running asset class with returns outstripping those of commercial property for the first time since 1999.

However, the advent of UK Real Estate Investment Trusts (REITs) (given the green light in the recent UK budget) is expected to further entice retail investors into commercial property funds through tax sheltered personal finance vehicles, such as Individual Savings Accounts (ISAs) and Self Invested Pension Schemes (SIPPs).

Suggestions that a tightening of the borrowing rules governing SIPPs could hurt the investment market are dismissed by chartered surveyors who, in a recent RICS poll, said that the changes would not affect the market place or appetite for commercial property in pension plans.

RICS forecasts a decline in total commercial property returns in 2006 and 2007 - 17% and 9%respectively – as a result of a slowdown in purchaser activity.

RICS economist Oliver Gilmartin said:

"The doors to commercial property are opening up to a much wider audience and individuals are beginning to appreciate that this kind of investment can generate income whist exposing them to comparatively reduced risk.

"We are seeing a rush into tax sheltered savings plans from those wishing to diversify their portfolios and spread their investments across different asset classes and geographical areas.

"However, while the next two years will continue to see healthy returns for investors in UK commercial property, some will be disappointed if they are expecting the kind of stellar performance experienced in the last three years."

Government unveils new regulations 

The government has announced new measures to increase compliance with building standards.

It is hoped a new system of monitoring for local authorities and approved building control bodies will measure their performance and how well they deal with those undergoing work, including people with property development finance.

A further review of regulations, to avoid unfair burdens for builders while maintaining energy efficiency as well as health and safety and accessibility standards, was also announced.

Buildings regulations minister Angela Smith said: "We must ensure that new buildings are healthy, safe, energy efficient and sustainable.

"These new performance indicators and standards, developed with the industry, will set out the conduct, service and performance for building control bodies that their customers expect to receive."

She added the government was looking at building regulations and how they match the way that buildings are constructed and inspected.

"We are determined to make them easier to understand and to ensure compliance, so we can deliver further improvements to standards including environmental efficiency as soon and as stretching as possible."

It is hoped by monitoring building control bodies, standards of site inspections, complaint procedures, assessments and processing of certificates will be improved.