Newsletter - Mortgages for Business - August 2004

Business Property Chronicle

• Property Interest Rate Report
• ARLA - Tenant demand continues to grow in private rental sector
• RICS rural land market survey for Great Britain - second quarter, April to June 2004
• CML Arrears and possessions flat in the first half of 2004
• Paragon Mortgages - Landlord Property Values Stabilise as Housing Market continues to Cool
• King Sturge release latest Industrial & Distribution Floorspace figures
• Nationwide - Market slowdown interrupted
• Financial Services drive office growth - RICS UK commercial property survey, quarter 2, 2004

Property Interest Rate Report

ARLA – Tenant demand continues to grow in private rental sector

For the second quarter running, tenant demand in the Private Rented Sector is increasing. This is reflected in the decrease in available rental stock and the increase in the number of new tenancies arranged by ARLA member letting agents. Void periods are down while rental returns have been maintained. These results are shown in the second quarter ARLA members survey.

The ARLA Review and Index which includes the ARLA Investor Landlord Survey, conducted at the same time, shows that only 2.7% among Buy to Let investors expect to sell their properties if property prices fall while 59% expect to buy further investment properties in the next twelve months.

Investor landlords remain committed to the long term, with the life expectancy of their investments averaging 16 years. Nearly half of these investors (45.8%) are aiming to create a 'Nest Egg' for the future and 43.2% hope to benefit from both rental income and capital gain. A mere 3.5% admitted to hoping for short-term capital gain and 7.5% have invested for income.

Commented Chairman Robert Jordan, announcing these results, "These figures clearly demonstrate that the Buy to Let investor has become a stable fixture of the Private Rental Sector. What is good for the rental market is also good for the investor landlord."

The ARLA members survey is the largest of its kind in the Private Rented Sector and the investor landlord survey is drawn from among the 8,000 subscribers to the ARLA Buy to Let website.

The ARLA Buy to Let Index for the quarter stands at 99.6 for cash purchases and 98.2 for geared investments. (Quarter 3 2002 equals 100). Annual rates of return on the cash purchase of a Buy to Let investment over five years show an average of 11.12% for all regions. The rates of return on geared investments for all regions average 22.77%.

During the second quarter of this year, capital asset values have risen substantially. In three months, the overall weighted average value of rented houses has risen from £331,300 to £338,000, (2%). The average value of rented flats has risen from £202,400 to £211,8000, (4.7%).

The average weighted rental return on a house is unchanged from the first quarter at 5.1% while the average return on a rented flat has fallen marginally from 5.4% to 5.3%.

Average void periods are down over the quarter, from 31 to 29 days a year, and it took 5.9 visits by prospective tenants to achieve a let this quarter, compared to 6.5 visits in the previous quarter. The average number of new tenancies arranged through ARLA member agents was up by 6.9% on the previous quarter.

Investor landlords report that 55.4% of all their tenants are employed, 8.9% self-employed, 15.4% are students and 14% are benefit recipients.

Said Robert Jordan, "It is obvious that the endless rumours about the housing market have no effect on the long term planning of the Buy to Let investor. They are there for the long term and recognise that should house prices soften, or even fall, the rental market is contra-cyclical and will gain from a rising tenant demand."

RICS rural land market survey for Great Britain – Second quarter, April to June 2004

The price of farmland is continuing to rise as demand outstrips supply, reveals the latest rural land survey published today (28th July) by RICS (Royal Institution of Chartered Surveyors).

Prices for the second quarter of 2004 rose by 16 percent on the same period last year. According to rural property chartered surveyors, farmland prices averaged £8630 per hectare in the twelve months to the second quarter of this year, the highest level ever recorded.

The rise in farmland prices continues to be exacerbated by a decline in the amount of land coming onto the market. The survey has recorded a consistent reduction in supply of land over the last five quarters.

Much of this can be explained by a lack of certainty amongst farmers and landowners regarding the mid-term review of the Common Agricultural Policy. This covers issues such as the continuing entitlement of farm support payments when land changes hands.

Demand for commercial farmland increased in quarter 2 2004 at the highest pace since the RICS survey began in 1999. Demand for land with a house is also increasing, but at a slower pace than earlier in the year.

The split between farmer buyers and non-farmer buyers remains fairly equal, as non-farmers continue to play an active role in the farmland market. They account for 43 percent of purchases over the last quarter, unchanged from the first quarter of 2004.

The volume of sales reported in the second quarter of 2004 is 23 percent down on the same time last year, although up 7 percent on the first quarter of this year on a seasonally adjusted basis.

Surveyors remain confident in their outlook for both commercial farmland and farmland with residential buildings.

RICS rural spokesman and chartered surveyor, Julian Sayers, says:

‘Chartered surveyors still believe that some farmers are holding back from putting their property on the market until the final implications of the single farm payment regime are known.

‘The high demand, which is particularly evident in the West Midlands and Wales , is in part driven by relatively poor investment returns in other asset classes. There is also the common dream of owning part of the British countryside. So far interest rate rises do not seem to be affecting buyer activity.

‘As we start to see growing certainty regarding the outcome of the CAP mid-term review, farmers should be encouraged to bring their land to the market if they wish to sell.'

CML Arrears and possessions flat in first half of 2004

The number of mortgages in arrears, and the number of properties taken into possession by mortgage lenders, remained flat in the first half of 2004 compared with second half of 2003, according to figures released today by the Council of Mortgage Lenders.

Set against the 11.8 million mortgages outstanding at the end of June, only 3,240 properties were repossessed in the first half of this year - around 1 in every 3,650 mortgages. This compares with 3,660 in the second half of 2003, and 4,230 in the first half of last year. At their peak in 1991, there were over 75,000 possessions.

The number of mortgages in long-term arrears continued to decline, but at a slower pace than in recent periods. As at the end of June, there were 39,470 cases of mortgage arrears of more than six months. This compares with 42,480 at the end of December last year, and 48,170 at the end of June 2003.

Short-term arrears showed an even more marked flattening out. The number of 3-6 month arrears cases was 51,020 at the end of June, compared with 52,650 at the end of December 2003, and 61,710 at the end of June last year. This suggests that arrears are now at or very near to their trough - unsurprising, given that interest rates have now begun to rise.

The stock of properties in possession awaiting disposal by mortgage lenders at the beginning of January 2004 was 1,960. The number remained virtually unchanged at 1,930 by the end of June. This is the lowest stock of possessions on record since the CML began collecting data on the stock of possessions in 1990.

Commenting on the figures, CML Director General Michael Coogan said:

"Arrears and possessions fell slightly in the first half of this year. With interest rates rising, it looks as if the long run of declining arrears has now flattened out. But we are forecasting only a very marginal increase looking ahead, with perhaps 60,000 cases of short-term arrears and fewer than 9,000 repossessions by the end of next year, reflecting higher mortgage costs within a stable economic environment. The forecasts remain very low by historical standards, and still below mid-year 2003.

"Most people will ride out interest rate increases with just a moderate tightening of belts. But for a minority, particularly those who have significant other financial commitments, higher interest costs will be harder to absorb - as reflected in the recent rise in unsecured debt write-offs. Anyone worried that they cannot afford their mortgage payments should discuss the situation with their lender, as there may be ways to reduce the monthly mortgage bill and so avoid accumulating arrears. Borrowers should also check whether they are entitled to any tax credits or benefits, as claiming them could make a big difference to their household finances."

Paragon Mortgages - Landlord Property Values Stabilise as Housing Market Continues to Cool

Paragon Mortgages' July Buy-to-Let Index provides further evidence of the continuation of the cooling trend in property values that began in May: prices paid by residential property investors were up only marginally, by 0.5%, in June. This is a slightly larger increase than last month's 0.1%, but remains much lower than the increases of 4.5% and 2.5% witnessed in March and April. Landlords are now paying an average property price of £137,849, up by just over £700 from £137,112 last month.

At the same time, rental incomes at £9,603 are down slightly this month from the record figures of £9,867 seen in May and £9,953 in April, partly reflecting the traditionally quieter summer period in the housing market. However, rents are still considerably higher than they were for most of 2003: this month's figure is 5.2% higher than in June 2003 (£9,133) and 6.8% up on the beginning of 2004, when rental income averaged £8,989.

John Heron, Paragon Mortgages' managing director, comments: "Over the past few months, we've seen landlord property values start to stabilise across the UK . Prices paid by residential property investors are still increasing, but only very slightly: in June they were up by just 0.5%, in contrast with the large rises seen in recent months, when investors had to compete with owner-occupiers in a busy market with limited stock available. The supply shortages of the spring seem to be over, and now investment properties have reverted to their customary trend of rising less rapidly than the housing market generally, as the strong demand from owner-occupiers has started to tail off. Landlords are typically able to strike better deals than people buying their own home as they are not emotive purchasers".

Annual house price inflation on buy-to-let properties has decreased from over 25% in April to 22.7% in May and to 16.9% this month, making Paragon's figure lower than the latest data published by Halifax and Nationwide. This provides evidence that as housing stocks grow and competition between buyers abates, landlords are once again getting better deals on properties than owner-occupiers.

Landlords continue to enjoy strong overall returns, with total returns generated since June 2003 (on an average property purchased that month) of almost 25% - a total of £29,080, comprising £19,948 in capital appreciation plus £9,133 in rental income, on a property worth £117,902 at purchase.

Seven out of ten regions provide landlords with a total annual return in excess of 25%. The North overtook East Anglia in generating the highest overall return, of nearly 60%. Wales offered the second highest total return to investor landlords of 43.7%, while Yorkshire & Humberside was in third place, with a similar level of return of 43.2%. The total annual return exceeded 30% in three other regions East Anglia (34.9%), South West (33.9%), and East Midlands (33.0%).
Nationally, landlord yields stand at 7.0% this month, slightly lower than in recent months.

Seven out of ten regions saw property values increase, with Yorkshire & Humberside up sharply by 12.1% to £98,114, the North up 11% to £77,169 and Wales up 10% to £109,297. Rents also increased in five regions, with the largest increases witnessed in those regions with the highest property price increases.

There was an easing of yields nationwide this month, with only East Anglia experiencing a small increase from 7.29% in May to 7.30% in June. As previously, the highest yields are achieved in the North and in the West Midlands .

King Sturge release latest Industrial & Distribution Floorspace figures

International property consultants, King Sturge, has released their latest report, 'UK Industrial & Distribution Floorspace Today'.

The total level of available industrial and distribution floorspace decreased by 1.7% on the previous survey to 19.77 million m² across the UK as at April 2004. This represents the first fall in availability since December 1999.

Scotland recorded a substantial decline of 18.5% in total available floorspace, whereas England and Wales as a whole increased by a marginal 0.8% in the four months to April 2004.

The level of available new floorspace decreased to 1.642 million m² across the UK , a decline of 9.0% between December 2003 and April 2004. This reduction indicates improved levels of occupier demand translating into transactions.

For large industrial units (10,000 m² and over), the total level of availability across the UK totalled 4.662 million m². This is down 1.6% on the previous survey. Occupier demand for large units is picking up. King Sturge data, which tracks user transactions for new units of over 9,290 m², indicates that in the first five months of the year, take up totalled 543,000 m². This figure looks favourable, compared with the long-term annual average of 986,000 m².

Annual rental value growth across the UK industrial market has improved marginally in recent months rising to 0.4% per annum as at April 2004.

The level of speculative development under construction across the UK totalled 567,452m², as at May 2004, up substantially since the start of the year. This large increase since January demonstrates that speculative development of big sheds is on the rise, following an upturn in occupier demand.

David Brooks, Head of Industrial Agency at King Sturge said, ”The significant activity in the big shed market towards the end of 2003, has continued into the first half of 2004. Developer confidence in speculative development in this sector has returned, with the likes of ProLogis, Gazeley and Gladman being particularly active”.

The outlook for 2004 as a whole is for modest industrial rental value growth of around 0.5% - 1% picking up over the medium term.

Nationwide - Market slowdown interrupted

• House prices up 2.1% during July pushing annual rise up to 20.3%
• Only 2 in 5 first time buyers now come from the 18-30 age group
• Many first-time buyers now putting down deposits of at least £30,000
• Headlines July 2004

Commenting on the figures Alex Bannister, Nationwide's Group Economist said:

"Following an easing during May and June, house price inflation accelerated again in July with prices rising 2.1%. This took the price of the typical property to £154,299, up 20.3% on a year earlier. July's increase outstripped our expectation that prices would rise in the 0.5-1% range for the rest of the year and appears to have been driven by continued buoyancy in the more affordable sectors and regions of the market. In particular, the regional growth pattern that emerged last quarter remains in place, with prices rising fastest in Scotland , the North and Wales . Nevertheless, the South, particularly around Greater London is seeing an improving labour market, resulting in a modest resurgence in price growth.

"Whilst recent anecdotal and survey evidence have suggested the housing market might be starting to slow, our own house price data accords with the recent strength of retail sales and mortgage lending. It is unclear whether the slowdown is yet to translate into hard data, or whether sentiment will prove to have been overly-negative. Previous downturns in anecdotal and survey evidence have not always translated into significant downturns in price growth, especially when they have not been accompanied by a deterioration in the economy - for example in the second half of 2001 and the first half of 2003. This means that considerable uncertainty over the direction of the housing market remains.

" UK homes have already risen by 12% this year, so our forecast for house price inflation, which remains 15% for the time-being, is likely to be reviewed over the next couple of months. The risks are clearly on the upside, with the forecast implying price growth of 0.5% per month for the remainder of the year. The upside risk predominantly relates to buyers' expectations of future house price growth, especially in areas with fast rising prices such as Wales, the North and Scotland. For the market to slow over the remainder of the year, expectations need to reduce to more normal levels.

"For buy-to-let investors and many second home owners, property is simply an asset class in the same way as equities and bonds are. For many other homeowners, although their homes yield benefits in terms of somewhere to live, they also have considerable wealth tied up in the property. When considering housing market valuations it therefore makes sense to compare housing to other asset classes.

"The late eighties rise in house prices only resulted in the ratio of house prices to equities rising slightly above its long-term average. However, the deterioration in the economy during the early 1990s resulted in large and prolonged real house price falls. More recently house prices have once again risen relative to equity prices, which in themselves are not obviously undervalued, suggesting that a slowdown in the housing market is inevitable and those expecting recent capital gains on property to persist are likely to be disappointed. However, in contrast to the early nineties, the economic outlook looks broadly positive and a repeat of a nineties style decline in house prices looks unlikely. The most likely conclusion to the current housing market cycle remains a drawn out period of low price growth.

Fewer 18-30s buy their own home, but those that do are putting down bigger deposits

"The decline in the number of first-time buyers over the last decade has been widely reported. However, over this time the characteristics of the group of people buying their first home have changed dramatically. Back in 1994, when Club 18-30 holidays was rebranded, 3 in every 5 first-time buyers came from the 18-30 age group. However, increasingly this is no longer the case. Property prices have trebled over the last 10 years and lifestyles have changed. Now only 2 in every 5 first-time buyers are aged between 18 and 30 and the number entering the market is currently 14,000 per month - down around 40% compared to two years ago.

"Buyers in this age group are still buying the same type of property – predominantly terraced. However, the size of deposit they put down has soared in recent years. Currently, one in two 18-30 year olds buying their first home are putting down more than £12,000 (compared to £2,500 in 1994) as a deposit and one in four are putting down more than £30,000. The rapid rise in deposit size supports the anecdotal evidence that many first-time buyers are now only able to get onto the property ladder with financial help from their families. In many cases this is likely to involve parents withdrawing equity on their own property. For the 18-30 group entering the market typical incomes have risen from £16,000 a decade ago to £36,000 now - compared with the rise in UK average earnings from £17,000 to £26,000 over the same period. However, even with a £36,000 salary it would take someone 5 years to save up a £30,000 deposit if they saved 20% of their take home pay each month."

Financial Services drive office growth - RICS UK commercial property survey, quarter2, 2004

An upturn in the financial services industry in the UK has provided a welcome fillip for the commercial office sector, says the latest RICS survey published today (12 July). Demand for office space in all regions of England and Wales has grown over the last quarter, led by the London market.

The inducements which landlords use to encourage tenants to take up leases (rent free periods and help with fit out costs) are a barometer of demand. These are in decline for the first time in three years, driven almost entirely by the Central London office market.

Elsewhere, the mixed performance of property reflects the mixed picture in the economy. Retail and industrial demand has fallen back, as has confidence in these areas. Many retail outlets and manufacturers experienced a bounce from economic recovery last year, but the market is bedding down and surveyors are reporting a new realism in the context of higher interest rates and uncertain economic outlook globally.