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Can BTL beat The property downturn?

The slow downturn in the property prices as interest rates hit 4.75 per cent has prompted some in the industry to ask whether buy to let is sustainable.

The boom in BTL has created a new group of investors but can they continue with their past success into 2005?The Association of Residential Letting Agents says in its third-quarter review of residential investment that the average capital asset values of rented flats and rented houses have risen substantially over the last three months, with values outside the South-east rising the most with rises of 10 per cent for houses and 8 per cent for flats.

The results also shows the average life expectancy of a property investment reported in the survey has risen to 18 years from 16 in the previous quarter. If house prices fall, 98 per cent say they would not sell their investment properties and none was definite that they would sell.

UK mortgage expert Owen Carey Jones says: “There is no evidence of a slowdown. Landlords accept that rates go up and down.”

Charcol says there are several economic and social factors that have driven and will continue to drive the growth in BTL, including a shortfall of over 500,000 properties available to purchase, first-time buyers’ inability to get on the property ladder, a rise of 8 per cent in the student population and new tax-efficient property investment opportunities.

But BM Solutions senior product manager buy to let John Bianco says the amount of investment in property will depend on how much is orig-inally in the pension fund and the timing of a sale of assets may be forced by the administrators of a Sipp.

He says: “Remember that the pension rules will only appeal to a certain proportion of society but we will certainly see people spreading their investments around, especially in the BTL sector.”

Although Bianco is confident that the BTL sector will continue strongly, he believes that landlords will not be building their portfolios but will use flexible mortgages to take out out equity to refurbish existing properties.

Fixed rate products are also serving BM Solutions well as uncertainty over how far rate rises will go are attracting landlords towards remortgaging with the firm’s two and five-year fixed rates at under 6 per cent.

Platform sales and marketing director Guy Batchelor says: “There are some fantastic deals out there for intermediaries. Lenders are comp- eting head-on and margins are coming down on our products.” Platform is offering a two-year fixed-rate mortgage at 5.7 per cent which is around 1 per cent more than a prime loan.

Paragon Group managing director John Heron says: “The majority of BTL borrowers are financially astute individuals, with 70 per cent, according to our research, keen to finance their investment to their best advantage by reviewing their mortgage arrangements at least every 12 months. Our research also revealed that buy-to-let investors value highly the expert advice that intermediaries can offer and view properties with a hard business head with a good return on capital firmly in mind.”

But a Nationwide report on a price slowdown says a contributory factor could be that there is a less demand from BTL investors, perhaps put off by low rental yields and the prospect of limited future capital growth.

Group economist Alex Bannister says: “There may be some investors who have placed their properties back on the market for sale to realise capital gains from the sharp rise in property prices over the last few years. Our research suggests that in recent months smaller properties in urban areas, which fit with the profile of typical BTL properties, have been more highly traded and are seeing their prices come under pressure relative to other sectors of the market.”

Durlacher analyst and director of research David Pannell is uncertain as to whether the BTL boom is sustainable beyond 2005. He says the first signal of a slowdown in this sector is that landlords are not increasing their portfolios. Net yields are also low after costs. Durlacher says: “It would be sensible for landlords to prune their portfolios. But BTL landlords are more optimistic than anyone else in the housing market and will be the last to realise this.”

So the experts seem to be divided on the BTL issue. The National Association of Estate Agents says the rental market is strong. Figures from letting agents indicate fewer vacant properties and higher average rents, up by 0.67 per cent over the last month and 3.2 per cent in the last year as potential first-time buyers decide to rent. Nationwide says the increase in the number of BTL mortgages may reflect equity withdrawal by previously outright owners of second properties rather than a rise in the stock of BTL properties.

Heron says: “On the one hand, as the homebuying market has cooled, landlords have seen a surge in tenant demand that will begin to lead to an increase in rent levels and therefore yields. Others, particularly smaller-scale private investors, may hang back to gauge the direction of the housing market before they dive in again.”

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