Will rising interest rates and stagnating rental yields lead to professional landlords squeezing small investors out of the buy-to-let market?
The number of landlords selling their properties rose by a percentage point to 5.2 per cent in the first three months of this year compared with the previous quarter – the highest level in two years – according to the Royal Institution of Chartered Surveyors’ letting survey.
RICS says some landlords are selling as a result of falling yields and rising borrowing costs. Not only have gross yields fallen for the third consecutive quarter but the pace of decline is accelerating at its fastest rate since July 2004.
Spokesman Jeremy Leaf says: “Interest rate rises later in the year will have a further dampening effect but the underlying strength of the economy and active housing market should ensure a soft landing for many.”
John Charcol senior technical manager Ray Boulger claims that many landlords with high loan-to-value mortgages will need to subsidise outgoings on their property with other income.
Boulger says: “I think the professional landlords who have a portfolio of some properties, in some cases tens or even hundreds, will have built up their business over a period of years and will often have quite a bit of slack in the system.
“They will have some properties with high LTVs and others with low LTVs but, overall, even if a rental income on one property does not cover all the outgoings, they will have other properties in the portfolio that will cover the shortfall.
“So I think professional landlords by and large will not be in the same difficult position as the amateur landlords who have bought one or two properties, thought it was a great way to make a bit of easy money and have not budgeted for interest rates going up, hence seeing a negative cashflow situation.”
Boulger says the economics of buy to let have been deteriorating as interest rates have been growing more quickly than rents. “I think professional landlords will see a downturn in the market or a bit of a softening as an opportunity to pick up a few more cheap properties because, inevitably, when conditions deteriorate, there will be a few distressed sellers.
“In most cases, if you have got a high LTV mortgage, the rental income on those properties is not going to be sufficient to cover the mortgage, the letting agent’s fees, repairs and other expenses, let alone any void periods.”
Savills Private Finance director Melanie Bien does not believe experienced landlords are squeezing out small investors but says the market can be offputting for new entrants.
After four base rate rises in less than a year, Bien says buy-to-let borrowers will find that the rent has not kept pace, which means it is harder to make money.
She says: “If someone is inexperienced, they need to appreciate the fact that you do need more than 100 per cent rental cover because you need to cover maintenance costs, letting costs and there could be a void period. If the mortgage goes up, then you are going to struggle.”
However, Bien says a lot of landlords are investing for capital gains and, if they are in it for the long term, will probably see some uplift in prices. “But for the novice landlord who does not have a lot of spare cash to cover the mortgage in the short term, they are going to be less inclined to get into the buy-to-let sector now or they will look to get out, which is what they seem to be doing, according to the survey,” she says.
London & Country Mortgages mortgage specialist James Cotton has a more optimistic view of the market. He says: “One of the real growth areas in recent years is the number of smaller landlords with one, two or three properties. We tend to see a lot of people like that in buy to let.
“If you look at now compared with the past, you can see that returns are not as good as they have been but that does not mean that we should just ignore it and move on to something else.”
He concedes, however, that professional buy-to-let landlords with a portfolio are in a strong position in terms of funding, finding properties, managing those properties and finding tenants. “Of course, they would have an advantage over someone who is more of an amateur landlord who runs properties as well as their own job,” he says.