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Rental arithmetic

As house price rises are finally reined in, the buy-to-let industry is confident that the figures still stack up for landlords, says Guy Anker

Major buy-to-let players are confident about prospects for the sector despite the US sub-prime crisis hitting equities and property markets over here.

Paragon Mortgages managing director John Heron says: “Despite ill-placed criticism of the BTL sector, rented accommodation is becoming an increasingly important part of the UK housing market, providing homes for the growing number of people who do not want the commitment of owning a property, and this is reflected in landlords’ confident outlook for the sector.

“Landlords are confident because tenant demand is strongly underpinning the market. Young people are choosing to stay in rented accommodation for longer.”

Royal Institution of Chartered Surveyors spokesman Jeremy Leaf says: “Many would-be buyers have decided to wait and see how the interest rate cycle will affect the market. Rising rents are offering some compensation for landlords who are experiencing higher borrowing costs.”

But RICS warns there could be a sting in the tail. Leaf says: “BTL investment will struggle for funding in 2008 as lenders become more discriminating, especially for sub-prime properties.”

The crisis forcing up sub-prime rates has not hit the prime BTL market although Savills Private Finance director Melanie Bien says: “If the mess goes on for a while, things may change.”

There is also a strong note of caution for people looking to enter the sector.

London and Country head of communications David Hollingworth says: “People have to be careful as buy to let is a long-term investment and the days of making a fast buck are over. Those who have little experience must not rush in. Landlords need to be picky about where they buy a property and keep their property in good condition. There is pressure on rental yields from interest rates so borrowers may have to put down a bigger deposit to be able to make the repayments.”

Nevertheless, there are signs that the market continues to enjoy growth. Rics says almost a third of surveyors reported a rise in tenant lettings in the second quarter of the year compared with 15 per cent in the three months to March.

The Council of Mortgage Lenders revealed in August that there were 171,800 BTL properties bought in the first half of the year. This was down by 3 per cent on the previous six months but there was an unprecedented 48 per cent boom in 2006 which makes comparative analysis difficult.

The Association of Residential Letting Agents operations manager Ian Potter says: “The sector is acting as the only viable safety valve for housing as a whole and bridging the gap between owner-occupation and the various provisions for social housing.”

However, BM Solutions’ BTL index, published in July, showed that total rental yields stood at 5.5 per cent for the year to June 2007 compared with 5.7 per cent for the previous 12 months.

These yields contrast with a 1 per cent base rate rise from 4.5 to 5.5 per cent over that period and base rate has since risen to 5.75 per cent. That represents a 22 per cent rise in borrowing costs for the year.

When publishing its BTL index in July, BM said: “Lower capital appreciation, together with mortgage payments rising more quickly than rental income, are likely to constrain demand for BTL properties.”

Yet BM sis still confident. Head of sales Phil Rickards says: “The fact that BTL investors are typically 40 , earning above £40,000 and put down, on average, 30 per cent deposits, suggests a market built on firm foundations.”

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