Newsletter September 2006

Buy to let market sets new records
Buy to let borrowing set new records in the first half of the year, with lenders advancing 152,500 loans, worth £17.5 billion. That represented an increase of 17% by volume and 20% by value over the previous record totals, posted in the second half of 2005.

There are now 767,000 outstanding residential buy to let mortgages in the UK, worth a total of £83.9 billion. Because the strong growth of buy to let borrowing contrasted with a slower increase in lending in the wider market, the residential investment mortgage market now accounts for 8% of the value of outstanding UK lending, compared to 7% in the first half of 2005.

The proportion of buy to let mortgages in arrears of three months or more rose slightly, from 0.68% of the stock to 0.73% in the first half of 2006. But arrears remained lower than in the wider mortgage market, where 0.96% of borrowers were three months or more in arrears in the same period.

Typical underwriting criteria in the buy to let market remained unchanged, with an average maximum loan to value ratio of 85% and lenders requiring rental income to exceed mortgage repayments by at least 25%.

Commenting on the latest figures, CML Director General Michael Coogan said:
"The buy to let market remains robust, underpinned by strong rental demand. But investors have shown that they are quick to adjust to changing market conditions, so the view that interest rates are now more firmly on an upward trend is likely to cause the rapid growth of buy to let investment to slow in the coming months.

"Fundamentally, however, the rental market remains sound and looks set to continue to offer good long-term prospects for astute investors."

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.

Rush to Join ARLA Spurred On By Bewilderment Over Rental Issues
The changing scene in the rental market has led to a sharp increase in ARLA membership. The number of lettings offices belonging to the Association of Residential Letting Agents jumped from 1715 to 1815 during the first six months of the year. This is the greatest single period of growth since the introduction of the Housing Act '88 and it is set to continue with new applications coming in at a rate of 30 a month.

Driving the new membership is the need to understand the implementation of much of the new legislation covering the private rented sector. This is exacerbated by frequently contradictory and inaccurate information from local authorities.

2006 is an unusually busy and complex year for legislation and regulation. It has already seen the Housing, Health and Safety Rating System (HHSRS), the licensing of some Houses in Multiple Occupation and Empty Dwelling Management Orders (EDMOs).

Still to come in the current round is the implementation of the Disability Discrimination Act, as it applies to rented property and the mandatory tenancy deposit schemes.
 
"Both landlords and tenants find there is often insufficient explanation given by the authorities to the public at large and this leaves them unsatisfied and bewildered," explained ARLA Chief Executive, Adrian Turner. "Their nearest and quickest source is the local ARLA member letting agent, who will also be bonded, insured and have qualified staff."

"The sharp rise in membership of a professional body such as ARLA emphasises how well the letting industry understands that this is the age of the consumer and that landlords, tenants and buy to let investors know that they all have rights and obligations and duties," both ethically and in law. They also understand that much of this needs to be explained to them by experts," said Adrian Turner.

"Some of the government-imposed framework is practical and based on the blueprints pioneered by ARLA and others in the industry. However, there are elements of legislation that are either impractical or left to the discretion of others, such as local authorities. It is in these areas in particular that landlords and tenants believe they are offered insufficient publicly available information and find that it is often contradictory and inaccurate," he continued.

Since July 6, Houses in Multiple Occupation that require to be licensed should have been registered with the local authority and local authorities have discretion to impose selective licensing on rental property in areas of low housing demand.
 
In addition, local authorities can now make Empty Dwelling Management Orders, EDMOs. The purpose of these has been misunderstood by local authorities as well as the public and the media. These orders are to bring long term empty or dilapidated properties back into use to help counter local housing shortages.

In December, the Disability Discrimination Act comes into force and there will be a code practice published in the autumn by the Disability Rights Commission. It is not expected to be onerous to landlords or their agents, despite the many rumours that have been generated. However, ARLA members are warning landlords that care must be taken to follow any guidelines.

Mandatory Tenancy Deposit Protection will follow next Spring. This legislation will require all deposits taken under Assured Shorthold Tenancies to be covered by an insurance-backed scheme or placed in a single national custodial scheme.
 
Details of the approved deposit protection schemes have yet to be announced. However, many ARLA members are already members of a scheme for regulated agents set up by the professional bodies more than two years ago.

Said Adrian Turner, "Given all this, it is hardly surprising that ARLA has seen the greatest single period of growth in its membership since the introduction of the Housing Act 1988. Increased membership now is a further validation of everything we have worked for over the years and it helps us to raise standards right across the lettings industry. It will also encourage more tenants to rent and more investors to buy to let."

Immigration drives record rent rises
In its lettings survey published yesterday, RICS (Royal Institution of Chartered Surveyors) has reported accelerating tenant demand and rental levels in the quarter to July.
One of the key factors driving this boost in the rental market has been immigration from EU accession countries, according to RICS. Surveyors report that immigration from EU accession countries (Government estimates stand at 427,095 since EU expansion) has put further upward pressure on rents in some regions.

Other key drivers cited by RICS are the current strength of the economy and declining accessibility.

Record rent rises
30 percent more chartered surveyors reported a rise in rental levels, as demand growth exceeded supply growth, up from 20 percent in the last quarter. The rise in rents for the quarter to July was the strongest in the survey’s history, almost four-times the long run average.

Tenant demand also accelerated in the quarter to July approaching the fastest pace since Q2 2001. 25 percent more Chartered Surveyors reported a rise than a fall compared to 19 percent in the last quarter with an ever strengthening economy and declining accessibility for first time buyers driving tenant demand higher.

Instructions to let property continued to grow, although the pace slowed for the second consecutive quarter, lagging behind demand. Tenant demand in London accelerated at the fastest pace since Q4 2000 with rents rising at the fastest pace in the survey’s history, driven by a strong corporate sector and migrant labour.

New investment in the rental market is subdued as gross yields remain low while ever increasing house prices are cooling interest.
 
Surveyors are confident the upward trend will be sustained in the next quarter with 28 percent more surveyors reporting confidence in rental increases compared to 24 percent in the last quarter.

RICS spokesperson Jeremy Leaf commented:
“Economic prosperity and population migration have increased rental demand pushing up rents, making conditions better for property investors. However, first time buyers will find it hard to enter the housing market with higher rents making it difficult to save sufficient sums for a deposit.”