Newsletter February 2008

Buy to Let Landlords Remain Confident for 2008

Buy to Let landlords have not been shaken by the credit crunch. Nine out of 10 surveyed during the last quarter of 2007 state they have no intention of selling their properties for nearly 17 years. Four out of 10 of them expect to invest further in the Private Rented Sector this year. These are among the findings of the latest quarterly ARLA Review and Index.

“This is good news for the whole of the Private Rented Sector and for the housing market, particularly as it comes from surveys carried out well after the credit crunch had begun to bite,” commented ARLA’s Head of Operations, Ian Potter. “The rental sector is the lynchpin for all our housing requirements and needs continual investment from private individuals as it still suffers from a lack of investment from the institutions.”

Buy to Let investors borrowed an average of 70% of the purchase price, down from 74% in the previous quarter. More than one in six borrows less than half. The average life expectancy of these Buy to Let investments is 16.7 years. This figure has been fairly constant for the past three years. Only one in 12 expect the investment to be less than five years and a mere 2% see it as short term, i.e. less than two years.

The quarterly ARLA Review and Index is distilled from information provided by investor landlords who subscribe to the ARLA Buy to Let website, as well as member letting agents.

The publication of the Review and Index is supported by the ARLA Group of Mortgage Lenders: Bank of Ireland, Cheltenham & Gloucester, GMAC - RFC, Mortgage Express, NatWest and Paragon Mortgages.

Although the majority of investors have bought existing properties, in good condition and ready to let, 7.5% reported buying off-plan during the last quarter.

“Buying off-plan flies in the face of the continuous warnings given by ARLA and the ARLA Group of Mortgage Lenders that this kind of property investment cannot make for a realistic Buy to Let investment proposition,” said Ian Potter..

“The rental market is too fluid to make judgements on rental values and likely demand months or even years in advance, for property that has yet to be built,” he continued. “We cannot repeat this warning often enough. The potential investor must take local advice from the professionals about the property, the way it is furnished and the realistic market rent.”

However, the vast majority of respondents to the survey state that they tend to side with caution and to give themselves a cushion, both in terms of equity and rental income. Well over half are cautious over both considerations.

On average, Buy to Let investors have been residential landlords for just over six years. Only two out of ten have been landlords for less than a year,

The Review and Index for the last quarter of 2007 shows the average rate of return on a cash purchase of residential investment property at 10.8% and for geared investments, assuming a 75% mortgage, 21.43%.

The fourth quarter surveys were carried out too early to judge any possible effect on the proposed changes in Capital Gains Tax from next April. Should tax relief on mortgage interest for residential investment be disallowed, a comparatively high figure, 37%, said that this would not influence them, although a further quarter said they would sell all or some of their property investments.

Warned Ian Potter, “Any alteration in the reliefs could seriously damage the Private Rented Sector. It is only with the help of the refinancing by Buy to Let investors that the sector has become properly viable again although, even now, we are still experiencing a severe shortage of property.”

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UK Student accommodation sales top £700 million as higher education continues to boom

Demand continues to outstrip supply in £20 billion sector, says King Sturge

The UK's student accommodation sector is no longer a niche property market and is now recognised as an asset class in its own right by financial institutions and investors, according to a new report.The latest student accommodation report from international property consultants King Sturge says there were over £700 million of transactions in the sector last year.

The firm handled almost all of these, the most significant of which was the disposal of the Moorfield student portfolio, involving the £190 million sale of around 4,000 bed spaces in several UK cities. And with the numbers of students continuing to rise - there were more than 1.43 million in full-time higher education in 2007, an increase of almost 6 per cent on the previous year - demand continues to outstrip supply, with an ongoing shortage of quality student accommodation in city centres.

As rental growth continues and the total value of the UK's 450,000 purpose-built beds passes the £20 billion mark, the report says investors have come to view the sector as being relatively secure and stable amid the current economic uncertainty.

"This year we have recorded a strong increase in the number of privately developed, purpose-built beds, up by 36 per cent since 2005 to more than 123,500," says Philip Hillman, the national head of King Sturge's UK student accommodation group.

"It is clear that the sector is entering a new phase of university-led development and refurbishment of existing stock, alongside an increased focus on the provision of premium accommodation for overseas students in major European university centres. And while significant opportunities still exist in London, with its supply-demand imbalance, this may be somewhat tempered by an increasingly restrictive planning regime."

Other findings in the King Sturge study include:

student numbers - the overall trend in student numbers is continuing upwards following a dip in 2006, which coincided with the introduction of variable tuition fees. The total figure has risen 31 per cent over the past decade, and this figure is expected to exceed 3 million by 2014.
 
accommodation provision - the private sector still only provides accommodation for 9 per cent of the full-time students in higher education, while the proportion of students living at home has increased slightly to 18 per cent, but the increase has not matched many forecasts by those who were concerned at the impact of tuition fees.

developer-operators and investors - the three market leaders in the sector remain Unite Group plc, UPP and Opal Property Group. Between them they account for more than half of the UK's existing student beds, and the 38,000-plus which are currently in the pipeline. The report also highlights increased activity among housing associations, for example, Sanctuary's 800-bed scheme for Queen Margaret University in Edinburgh and Signpost Homes' new accommodation at Exeter University.
 
quality of university residential accommodation - the report says en-suite bathrooms have become the norm, while facilities such as gyms, swimming pools and concierge services are also being provided.

overseas student demand - the report notes that university applications from EU students has risen more than 14 per cent in the past two years, while the figure for non-EU students is 5.5 per cent, with London alone attracting around 32,000 Chinese students.

key locations - outside London, Manchester has the UK's highest student population, at around 70,000, followed by Glasgow, Birmingham, Leeds and Edinburgh. The report notes that cities such as Liverpool, Nottingham, Sheffield have seen substantial commercial development in recent years, whereas traditional college-provided accommodation continues to dominate at Oxford and Cambridge.
 
the London market - London has more than 250,000 full-time students in over 20 universities and is now attracting overseas investors such as US private equity house, Blackstone Property Management Ltd., which is developing major 1,000-plus bed schemes focused on the overseas student market.

Philip Hillman concludes: "Despite the general uncertain economic outlook, more students are choosing to participate in higher education - a trend that shows no sign of slowing.

"After a period of extraordinary growth in the development by the private sector of direct-let student accommodation, the prime focus now for the private sector is for direct-let schemes in the capital.

"There will, however, continue to be large-scale developments in provincial university cities, where there is still an imbalance in the supply of good quality purpose-built accommodation."

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Opportunities still there for commercial property investors

Despite gloomy predictions for commercial property values over the coming months a leading Nottingham expert feels the market still offers opportunities for investors.

David Findlay, partner in charge of investment at King Sturge, Nottingham, said yesterday that the introduction of Energy Performance Certificates (EPCs) and tougher build regulations will increase the costs of new construction but the resulting fall in supply should mean the value of standing investments will hold up well.

Mr Findlay said: “As long as the ‘real’ economy grows by two per cent or more, occupiers will continue to seek new accommodation.

“We anticipate a continued low level of investment transactions in the first quarter of 2008, with true market prices still generally below current valuation levels. However, valuations are catching up. Vendors under pressure to sell, such as the retail funds, have adopted strategies to lock investors in, avoiding fire sales, and buyers are only looking for bargains. As 2008 progresses, recovery in transaction levels will be gradual, but slow.”

Mr Findlay added that while base rates may continue to fall a little further, banks are likely to remain cautious in their lending policy, demanding large margins and low LTV ratios.
 
He said: “Both investors and banks are in abeyance, keen to ensure that the occupational market continues to hold up before they will renew confidence in commercial property. This is despite the comparative value now available in the market. Vulture and recovery funds set up to take advantage of better value in the market will become increasingly active, and as a result market values are likely to start to stabilise in the second quarter.

“Fundamental to this will be two factors: user demand holding up well and the cost and availability of finance. Interest rates should continue to fall, and we are relying on banks to ease credit liquidity as the year progresses.”

Mr Findlay added that the vulture and recovery funds will pay particular attention to quoted companies and REITs, trading at significant discounts to net asset value.

He said: “Pricing of companies, indirect vehicles and derivatives require close scrutiny as Property Indices and valuations still lag the market, and need risk adjustment for the stock in question.”

But he warned that changes in Government legislation, due to be introduced in the months ahead, could increase investors woes.

He said: “An increased void rates burden on investors, and the launch of Energy Performance Certificates, for which neither investors nor the Government seem prepared, could not have been worse timed. However such market intervention will inevitably create opportunities, and the polarisation between prime and secondary property created by EPCs will enable some investors to profit through specialist refurbishment. Overall we expect greater market equilibrium later in the year, and excepting further major shocks in the financial and occupational markets, a gradual stabilising in values, and recovery in transaction volumes after the second quarter, though still some way short of 2006/2007 levels.”

He added that he expected investors to remain wary of some property performance data, and its susceptibility to not delivering a “real time” picture of capital value movement.

“Whilst valuers continue to lag the market, and until pricing stability is achieved over an extended period, relative performance data loses meaning. Index based pricing on indirect vehicles and property derivatives, has become a difficult art, and risk adjustment imperative, relative to the stock under review.

“In an investment market under the cosh with transaction levels significantly down, Government intervention is going to further impact on liquidity. The increase in the void rates burden in April, together with the shambolic preparation for its legislation requiring Energy Performance Certificates (EPCs) to legally deal, will frustrate sales in the short term. Buyers will have to get used to the idea of greater irrecoverables on industrial property, and with many investors not having EPCs prepared, there will be a rush to get them done, and a shortage of assessors.”

Mr Findlay added that as occupiers adopt “green” policies and snub older, energy consuming buildings, rental growth prospects will increasingly be dependent on EPC rating.

He concluded: “The implication is a widening in the gap between prime and secondary investment product. This in turn will result in developers and speculators focusing on well located older buildings where a profit can be made by upgrading an EPC rating and thereby making a secondary building acceptable to prime buyers.”

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