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BTL buckles in the crunch

Until recently the buy-to-let sector was the one area that has held up under the pressure of the credit crunch. Lenders have been slower to tighten up criteria and restricting lending than in other sectors.

This is showing some signs of change, with some BTL lenders reducing loan to value ratios or increasing the rental cover needed as they too try to deal with a shortage of funds to lend.

The Mortgage Practitioner sole practitioner Danny Lovey says: “The criteria have been tightened up a lot in the last.”

But figures from estate agency Hamptons International suggests that there are still some areas that are producing good returns.

Research manager Rob Bruce says: “Despite the well publicised increase in the cost of capital, rental levels continue to escalate above house price inflation, pushing yields higher.”

The research covers predominantly the South-east, where the firm is based. London comes out as the best area for investment has kept rents high. Hamptons reports that, on average, buy-to-let investors in London can expect a rental yield of 4.55 per cent but this varies across different boroughs, with Islington having the highest average yield at 5.43 per cent and Sheen the lowest at around 4 per cent.

Location is as important as ever, with a two-bedroom flat in Islington generating a yield as high as 6.76 per cent.

Hamptons reports that the best areas outside London for yields are Brighton and Hove, with yields of 4.32 per cent and 4.22 per cent respectively, and St Albans with a return of around 4 per cent.

Bruce says: “In the current environment, smart investors can negotiate a good deal on the acquisition, letting and management of a property. With yields in London at 6.76 per cent in some locations, this outstrips the annual return of many conventional investment mediums, with the compounding effect of long-term capital returns.”

Figures from Birmingham Midshires show that the average rental yield for the UK was 5.3 per cent in 2006 and 5.4 per cent in 2007. When you add in capital appreciation, the total return becomes 13.5 per cent in 2006 and 16.3 per cent in 2007.

But with faltering house prices, investors thinking about buy-to-let are likely to be dependent on the rental yield alone. Bruce suggests that although the rental yield figures are reasonable, investors should accept a longer-term view on capital appreciation.

Without capital growth, the yields from buy-to-let, while solid, can look less than impressive. An investor putting money into an NS&I income bond, for example, can currently get a return, before tax, of 4.7 per cent a year. Investors in a short-term fixed-rate bond with a retail bank can get significantly more with widespread rates of 6.3 per cent or higher.

Lovey says: “Rental yields just do not stack up.”

He says even on 125 per cent rental cover, once an investor has paid a letting agent’s management fee, the service charge and taken into account wear and tear, let alone void periods, the individual buy-to-let investor is not making much money.

“In my opinion, it is now not worth a carrot,” says Lovey. He says that in the past, rising house prices have allowed people to say, I do not need the rental yield. As long as it covers the mortgage I can rely on capital appreciation.”

Savills Private Finance director Melanie Bien says the days of making a fast buck are over but there are sound investments for investors willing to invest for the long term and search for the right property.

Bien says: “It is very important for a landlord to research the area where are they are going to buy.”

Despite the tightening of criteria, Bien says there are still some deals around. “Looking at the best buy tables, it is still possible to get 85 per cent loan to value, which is more generous than it was a few months ago.”

But with the best rental yields in London and the South-east and a sizeable deposit needed to secure any lending, part-time landlords who rely on income from only one property are getting priced out of the market.

Lovey says: “Have I seen a semi-serious buyer in the last year with deposit money? No, I have not.”

Highclere financial services partner Alan Lakey says the rental yields available have ceased to be attractive to smalltime landlords but this could be a good thing.

He says: “Buy to let as an investment is overstated, overused and dangerous. If someone gave me £100,000 to invest as I chose, I would not put in property. People are mesmerised by the fact that property prices have been rising in recent years but that will not always sbe the case.”

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