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A consumer&#39s view

As returns from equity investments continue to look dull, an increasing number of investors are turning to buy to let as an alternative, particularly in the area of long-term savings and pension provision.

The worry is that when everybody thinks now is the time to do something – invest in tech stocks in 1999/2000, classic cars and gold when it hit $850 an ounce in the 1980s – it is usually the time to get out or at the very least to take a conservative approach and have a fall-back position if times get tough.

Latest figures from the CML reveal that £4.1bn of new buy-to-let lending in the second half of last year brought the overall total up from £11.3bn at the end of June to £14.7bn by the year end.

What is more worrying is that the average loan-to-value ratio is now 80 per cent and the average rental cover (the amount by which mortgage payments are covered by rental income) is 130 per cent.

Anyone advising clients on residential property investments would suggest that a more prudent ratio is a 60 per cent loan to value and some lenders very sensibly refuse to go above 75 per cent.

But when you view this against what is happening in the rental market and the amount of new investment property due to become available, particularly from new build, the outlook for rentals in the short term is not good and investors who have a very high loan to value could find themselves in trouble.

Graham Gould of Residential Property Investment Management spells out the risks when he says current market conditions in the London property market show prices are firm but rents are under pressure. We all know that what happens in London eventually filters out to commuterland and further afield.

Demand for rental properties is influenced by economic activity and the employment market, both of which are currently in decline.

Gould believes that alth-ough prices are holding up well at the moment and negative equity is not a problem, what we could see is “negative cash flow”. In other words, buy-tolet investors will have insufficient rental income to service their debt.

Gould believes that good investment returns can still be made in London but that the amateur buy-to-let investor is taking more risk now than at any time in the last five years.

Talk to any London estate agent and they will tell you that there are now more available properties to let than there are tenants, particularly in the one-bedroom and two-bedroom sector. This is clearly having an affect on rental values achieved.

Gould says the investment market is what is driving house prices in London. He estimates that 10,000 properties in new developments have been put on the rental market in central London over the last three years and that 15-20 per cent of all purchasers in London are investors.

He says there appears to be a significant oversupply of rental property above £600 a week. It has been estimated that rentals in this market sector are currently below 1998 levels. Gould says in his own market sector – professional sharers – demand has weakened and turnover of tenants has increased.

The fall-off in demand for rental properties in London has much to do with the economic climate and the recession in the City. Much of the London rental market is underpinned by well-paid foreign bankers and brokers coming to London to work, which supports the £600-a-week-plus market.

At the other end of the scale, there are fewer young professionals coming to London to work as the big firms of solicitors and accountants cut back recruitment to take acc-ount of the downturn in the economy. In addition, the IT sector, which attracts a big number of short-term contract workers who more often than not rent, is bombed out and for the first time these workers are facing unemployment.

The message is clear for all advisers and their buy-to-let clients – expect lower returns from buy to let. Make sure you have sufficient cash to weather a couple of years of lower ren-tals and higher charges for finding tenants. Amateurs who have typically managed properties themselves may need to pay an agent 10 per cent of the rental income to find a tenant.

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