Newsletter August 2006

Landlords invest while rents are steady

Average rents achieved on residential investment properties remain steady, and while they do, landlords continue to invest, according to a new report.

The typical landlord earns a gross rental income on each property of £10,189, or just over £849 per month, a rise of 0.8%. This compares with April’s figure of £10,113 and March’s of £10,082, the June edition of Paragon Mortgages’ Buy to Let index shows.

At the same time, investment property prices continue to edge up, rising by 2.9% over the month, from £164,247 in April to £168,935 in May. The price at which landlords purchase properties has risen by 7.7% over the past twelve months, reflecting the relative buoyancy of the residential property market in late 2005 and early 2006.

John Heron, Paragon Mortgages’ managing director, says: "With rents stable, tenant demand healthy and market confidence solid, landlords continue to purchase new properties in a generally upward moving property market. Investor activity has been increasingly strong over the past nine months."

"Investors are dispassionate purchasers and buy in response to growing tenant demand, rather than in the expectation of short term capital appreciation. They purchase properties in locations where they believe that tenant demand will remain sound over the medium to long term, paying particular regard to local amenities, transport links and the individual preferences and expectations of the people who are likely to rent the property."

Average rental yields stand at 6.0%, although there continue to be variations between regions.

Regionally, yields tend to be higher in parts of the country where property prices are lower, while Greater London and the South East, where prices average £327,139 and £184,087 respectively, consistently have lower yields (5.7% and 5.8%).

For the second consecutive month, the East Midlands and the North West head the table as the highest yielding regions, at 6.6% and 6.6%. Prices in these regions are respectively 19.2% and 25.1% below the national average.

While Greater London has the lowest rental yield, the total return for the capital (based on property value appreciation and rental income) is strong. London has again this month generated the highest total return, of 36.3%, on a typical property purchased 12 months ago. Greater London was followed by the North at 34.7% and East Anglia at 28.4%.

National total returns stood at 14.4%, unchanged from April.
John Heron concluded: "Landlords are experiencing solid demand for rental properties as economic conditions remain sound and interest rates are stable. There is a long term structural shortage of good quality residential property in the UK, and demand for it is growing steadily."

"In addition to the demographic growth in the number of households, there is a steady influx of migrant workers, who tend to choose rented properties for their accommodation needs. Over the next five to ten years, the private rented sector is expected to grow steadily on the back of a stable economic environment."

Business property demand up at fastest pace in two years

Demand for industrial property has risen at the fastest pace in two years whilst the retail property market continues to decline, despite its recent improvement in consumer spending, says the RICS commercial property survey.

Retail property demand has fallen for the sixth consecutive quarter.
The falling price of goods and rising oil prices have forced retailers to focus on efficiency, with employment in decline. Investment activity has increased in the retail sector despite this drop off in occupier demand. Occupier demand in the office market accelerated at the fastest pace in the survey’s history with 26% more Chartered Surveyors reporting a rise than a fall.

The increased rise in activity occurred despite financial market turbulence and was again almost entirely driven by the London market.

Time out for landlords with unlicensed homes

Landlords failing to licence their properties in multiple occupation (HMOs) can be prosecuted by councils and face fines of up to £20,000 following new powers available from last week.

The new measures mean that if an HMO is occupied without a licence, a local housing authority has the power to seek an order for the repayment of up to 12 months' housing benefit paid out while the property was let without a licence.

Tenants can also seek an order for recovery of rent they have paid while a licensable property was let to them without being licensed.
Housing Minister Baroness Andrews said the new measures strengthened the important reforms introduced by the Housing Act 2004. "We have given landlords three months to apply for an HMO licence without fear of penalty for not having done so. These new powers will strengthen the licensing provisions and offer further protection for tenants. They also mean decent landlords will see an end to unfair competition from those avoiding their responsibilities," she said.

A house in multiple occupation is a property where 3 or more tenants who are not all members of the same household are sharing some or all of the living accommodation and/or amenities.

Since 6 April 2006 any HMO which is on 3 or more storeys with 5 or more tenants in 2 or more households is required to be licensed. Councils also have the discretion to designate areas within their district for additional licensing, requiring other HMOs to be licensed.

Private rented sector flourishes as household numbers and migration grow

Trends in Buy to Let remain positive as landlords continue to increase their involvement in the private rented sector on the back of steadily rising demand for rented accommodation: household numbers are growing and are projected to continue to grow as a result of a changing population demographic and inward migration.

The July edition of Paragon Mortgages’ Buy to Let Index shows that average rents achieved on residential investment properties have risen significantly over the last three months, by £351 or 3.48%.  The typical gross rental income on a property rose by more than £240 or 2.39% to £10,433 in June alone, compared with £10,189 in May.
Investment property values also continue to edge up, with an increase of 2.27% over the month and 7.29% over the quarter, from £161,039 in March to £172,772 in June.

With property values rising and rents either stable or rising, landlords have benefited from an increase in average total annual returns on their Buy to Let investments.  In percentage terms average total returns rose from 11.89% in January to 16.51% in June.

John Heron, Paragon Mortgages managing director, explains: “The UK population is growing, unlike many Western European countries, by around 0.3% per annum, according to National Statistics.  A key element of this is the influx of migrants, with net migration of 223,000 in 2004 and perhaps rather more than that in 2005.  It looks likely that Government projections for a net influx of around 145,000 migrants annually will be comfortably exceeded – the British economy is doing well and there are plenty of jobs for people from EU Accession States and many other countries.”

“Housing demand is growing, with more single person households, higher numbers of students as well as the effect of immigration.  The Department for Communities and Local Government forecasts 209,000 households need to be formed per annum, with immigrants accounting for perhaps a third of new households.  Such newly formed households are most likely to live in rented accommodation – indeed, the CML reports that only 20% of migrants become homeowners within 3 years. In response to this growth in demand for rented properties, landlords are actively building their portfolios in all parts of the country.”

Average rental yields stood at 6.04% in June, up slightly on the previous month’s 6.03%, although there continue to be variations between regions.  Rental yields this month remain higher in the regions where property prices are lower.  On the other hand, in the South East and Greater London, yields are lower due to significantly higher property prices.

The South West and Wales have the highest yield, at 6.48% and 6.47% respectively, while the South East and Greater London are lowest, at 5.83% and 5.78%.Regionally, Greater London has achieved the highest total annual return for the second consecutive month at 37.69%, closely followed by East Anglia (37.61%) and the North (32.91%).

John Heron said: “Trends in Buy to Let are undoubtedly very positive at the present time.  We are seeing robust activity both from major landlords and also from the retail investor, who will often purchase to augment their long term investment portfolio or to supplement their pension. Long term trends in terms of household formation and inward migration point to a steady growth in the role of the private rented sector in meeting people’s housing needs and investors are responding to this by increasing their involvement proactively.” 

BRC rent campaign 'may provoke law change'

A campaign by the British Retail Consortium (BRC) to change the rent payment terms set out by landlords may result in a change in UK property laws, according to property consultancy Donaldsons.

The BRC states that retailer rents should be paid monthly, in arrears, compared to the current terms where tenants pay three months in advance.

While trade creditors are able to change payment terms depending on the circumstances of the debtor, this does not apply to the commercial property sector, says Donaldsons.

'The reality is that commercial property is subject to laws that simply don't apply to other creditors', Charles Woollam, partner in Donaldsons, told Retail Bulletin.

'Rightly or wrongly, the property market has some unique characteristics and unless the law is amended to give landlords the same rights as other creditors to suspend business dealings with unreliable tenants, many property owners may be reluctant to accept the same payment terms as other creditors', he added.

According to the BRC, paying rent in advance costs retailers an additional £145 million a year. This puts particular pressure on small businesses, says the organisation.