Buy-to-let bounce

Owning property may not be considered the one-way ticket to riches that it has been in the past. But given the performance of the alternatives over the last decade, it is no wonder buy to let is taking its first steps towards a comeback.

Yes, people have got burned with buy to let – if you gear your investment by a factor of four, you have got to expect some pain if things do not go according to plan – but people have been hammered by equities too, yet most of us keep buying them every month through our pension deductions.

There is no guarantee that history will repeat itself but the majority of landlords in the market for at least 10 years have done very well indeed.

Just how well is hard to gauge but the best figures we have show that the average investor in bricks and mortar did better in the noughties than people in other asset classes, even allowing for the credit crunch.

There is no index that charts the returns of buy-to-let investors as such. A number of organisations produce indices and other data showing fluctuations in property prices and rental yields but there is nothing publicly available that synthesises the two into a single annualised return on property that reflects what an average buy-to-let investor has received.

Arguably, the closest we have to that is the IPD UK residential index. This compiles the income and growth in capital value of thousands of residential properties bought and managed by professional residential property companies.

Figures for 2011 are not out yet but the data for the 10 years to 2010 shows residential property outstripping other asset classes quite considerably. In the first decade of the 21st century, residential property returned an annualised RPI-adjusted return of 7.1 per cent compared with 3.7 per cent for commercial property, 3 per cent for gilts and just 0.8 per cent for the FTSE all share with dividends reinvested. Even over the three years between 2008 and 2010, when the bottom fell out of the market, the IPD UK Residential index only shows an annualised return of -1.3 per cent compared with an annualised -1.2 per cent for equities.

Where this rosy picture differs from the experience of some landlords is that these numbers do not include gearing. With unskilled or unlucky investors probably doing considerably worse than average, multiplying that loss by four will have proved extremely painful.
As has been widely reported, market conditions are ripe for buy to let to start rolling again. The long-term factors of lack of housing supply, population growth and the trend towards living in smaller households are being compounded by the inability of would-be first-time buyers to get their hands on the credit that will put them on the housing ladder.

Rental yields leapt to 6.6 per cent in the fourth quarter of 2011, according to Paragon, the first time they have broken out of the 5.9 to 6.3 per cent range for at least six years.

Even taking into account voids, repairs and agents fees, for anyone with cash to invest, these sort of numbers make residential property look particularly attractive.
Yes, yields also reflect falling property values and the jury is, of course, out as to which way property prices will go but the income available on well-run properties in the right areas is looking pretty attractive right now. At least it is for those with a lot of cash. It is when borrowing gets thrown into the mix that buy to let gets considerably more risky.

Maybe someone should develop a new index that not only reflects property prices and rental yields but also the average cost to a landlord of servicing a 75 per cent loan to value interest-only lifetime mortgage. That way, the true nature of the risks and potential rewards of buy to let can more easily be made to the wannabe landlord.

John Greenwood is editor of Corporate Adviser