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Feast or famine

The dearth of mortgages available to first-time buyers is allowing professional investors to binge on buy-to-let, making the sector the one growth area this year. Gregor Watt reports

The continuing difficulty facing first-time buyers trying to find mortgage funding is providing attractive opportunities for buy-to-let landlords.

The BTL sector has been the one growth area for mortgages this year and many lenders predict 2012 will also be a good year for landlords.
The shortage of mortgage funding for FTBs has forced many potential buyers to stay in the rental market. In addition, an analysis of the BTL market published by the Council of Mortgage Lenders last week says other potential buyers are cautious of buying due to concerns over rising unemployment while those who would traditionally have tried to buy and sell at the same time are now choosing to sell their existing property and move into rented accommodation until they find their next home to buy.

This is all contributing to demand from a limited stock of private rental property and rents have risen significantly this year as a result.

According to LSL Property services, owners of estate agencies Your Move and Reeds Rains, September saw the ninth consecutive monthly rise in average rents. Although September’s monthly increase was only 0.2 per cent, the average increase in rents this year is 4.1 per cent.

LSL Property Services commercial director David Brown says: “Despite the slower rate of increase, the cost of renting is still rising annually at nearly twice the speed of the average salary and many tenants will need to dedicate a growing portion of their disposable income to the cost of accommodation over the next year.”

Mortgages For Business managing director David Whittaker says: “The famine of mortgages for first-time buyers is allowing professional investors to feast on buy to let. It is one of the few areas providing attractive investment opportunities in an otherwise unappetising market. Despite some slowing of growth, rents are still at record levels and investors can sleep tight in the knowledge that yields will remain consistently high.

“Swathes of first-time buyers remain unable to open the door to the mortgage market, leaving them locked in the private rental sector. And if the eurozone crisis worsens, as it is certain to do, lenders will be even less inclined to target first-time buyers.”

LSL’s figures show the average yield on rental property is now 5.3 per cent, an attractive level of return compared to the rates on offer for cash-on-deposit or against the stockmarket. In comparison, the FTSE 100 is down by 8 per cent so far this year and the best rate on offer for five-year bonds from a high street bank is 4.7 per cent from Clydesdale Bank.

Paul Hunt, managing director of Phoebus Software, says: “According to LSL’s buy-to-let index, yields have reached 5.3 per cent – their highest level in more than three years. The UK’s average rent hit record highs for the last five consecutive months. For both lenders and land-lords, buy-to-let offers strong opportunities for expansion and as first-time buyers continue to struggle to put together big deposits for purch-ase, this is sure to continue.”

BTL investors have not been oblivious to the returns on offer. The latest lending figures from the Council of Mortgage Lenders show BTL lending has grown strongly over the last six months as investors and landlords expand the number of properties they own.

In the three months to the end of September this year, the number of BTL loans grew by 16 per cent compared with the previous quarter while the value of BTL loans increased by 19 per cent. This followed similar growth in the second quarter of 2011. The BTL market is still some way of its peak in 2006 and 2007 but lending in the sector is now at its highest level since the end of 2008.

Hunt says: “The growth of buy-to-let lending in the third quarter will be welcome to all as it will boost the supply of private rental accom-modation available but there is still plenty more scope for increasing activity in the sector before the heat goes out of the rental market for landlords.”

Brown also thinks there is plenty of momentum left in the current growth of BTL borrowing and says: “Although buy-to-let lending has picked up steam, which has helped expand the supply of rental properties, it is still a long way off boosting supply enough to ease competition among prospective tenants.

“With no sustained meaningful increase in lending in light of the ongoing eurozone crisis, we are unlikely to see a sustained drop in the number of frustrated buyers in the coming year and underlying demand for limited accommodation will continue to push up rents in the long term.”

However, there is an upper limit to how far yields can increase and any measures that improve lending, particularly for FTBs, could see some of the steam let out of the rental market.

Whittaker says: “Over the long term, buy-to-let yields are unsustainable at current levels, so we will start to see these fall. In addition, George Osborne is likely to announce proposals in his autumn statement for the Government to underwrite first-time buyer loans.
“This could be the shot in the arm that the ailing owner-occupier market so badly needs.”


The challenges facing the Government’s mortgage indemnity scheme

The Government’s mortgage indemnity scheme could fail unless lenders are given capital relief when lending at higher loan-to-value ratios. The scheme, which will launch in spring next year, is designed to encourage lending at higher LTVs. Housebuilders will deposit 3.5 per cent of the sale price in an indemnity fund for each home sold through […]


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