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A consumer&#39s view – Lorna Bourke

Estate agents, like stockbrokers, are perennially optimistic. So when one or more admits that not all is rosy in the garden, it is definitely time to sit up and take notice – if you have not already heeded the obvious warnings.

The latest research from Knight Frank reveals some startlingly depressing statistics for buy-to-let investors. It would be a brave person who put new money into the buy-to-let market and intermediaries should warn their clients of the dangers.

Knight Frank&#39s research shows that, during the year to March 2002, prime property rental levels fell by 4.9 per cent. More important, a 40 per cent increase in supply across the capital “has impacted strongly upon the marketplace. Tenant demand is for prime locations and there is a marked slowdown in transaction activity”.

The report goes on: “The supply increase and moderate fall in rental values can be explained partly by the surge in new residential investment activity during 2001 and partly by weakening activity in the City, which impacts upon tenant demand.”

It goes on to maintain that much of the overheating in the buy-to-let market has been at the lower end, which is definitely suffering from a huge fall-off in demand from tenants. The reasons are obvious. As the economy slows, fewer jobs are created so the demand from young people coming to the capital to work declines. But there is no doubt that, in spite of Knight Frank&#39s opinion that the prime end of the market is safe, there is real evidence that this is suffering, too.

A wealthy stockbroker who sold his Holland Park home 18 months ago, taking a near 100 per cent profit after only four years, has since been renting. He reports that when his rental came up for renewal, he was able to negotiate a 50 per cent reduction. The landlord was prepared to accept almost any rental level just to keep the tenant.

As Knight Frank euphemistically puts it: “Landlords need to be flexible in their approach, both to tenants&#39 needs and how much they are prepared to receive in rent. With increasing uncertainty regarding the sustainability of recent house price rises, we expect households to adopt a wait-and-see approach to buying.”

Anyone who has bought investment property in the new Paddington Basin development or Imperial Wharf at Chelsea Harbour, who has been hoping to rent to a wealthy City type or foreigner, must be alarmed at this fall-off in demand. There are going to be a few burnt fingers.

It is important to remember that while, no doubt, there will be pockets of residential property investment which will withstand a downturn in the market (university catchment areas are an obvious case in point), what happens in London eventually filters out to the rest of the country.

But if it is bad news for buy-to-let investors, it is definitely good news for homebuyers, in particular, first-time buyers. Foreign investors in London residential property investment are typically very highly geared, with 100 per cent borrowings commonplace.

When the disappointed landlords find they cannot sign up a tenant at a high enough rent to cover the mortgage interest payments – or find any tenant at all – they will put their property on the market and sell. House prices should return to more realistic levels and first-time buyers may be able to get a toehold on the property market.

Mortgage broker Charcol maintains that things are not as bad as reported for first-time buyers. Ray Boulger says: “We estimate that the number of excluded first-time buyers could be more than halved if would-be borrowers explore the options open to them. Increased demand and concern among first-time buyers has prompted many lenders to adopt an innovative or pragmatic approach in order to help them.”

This is good news for those looking to buy. But for IFAs with investment clients, caution must be the watchword. The time has come for buy-to-let investors to step back and let the market settle down.


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