No one could deny the March Budget was designed very much with the private rental sector in mind. Having established that the coffers are empty in terms of its ability to fund social housing, the Government has accepted it needs the private sector to step up to the plate and help bridge the housing gap. The Budget was an attempt to deliver the first of what we hope will be a number of carrots to help with growth in the sector.
Measures designed to tempt institutional investors, such as major pension funds, into the residential housing market included changes to the way stamp duty is charged when more than one property is purchased. The duty will now be calculated according to the average value of the property rather than the bulk value.
Another institutional investor-friendly proposal included making it easier to place residential property portfolios in real estate investment trusts.
There is already talk that the measures could drive £7.5bn worth of institutional money into residential property but we should be cautious about overestimating the impact of the Budget. Some institutions have welcomed the Government’s action but others are unconvinced residential property can bring them the returns they would like.
This means the provision of property in the private rental sector will remain very much the mainstay of private landlords. As has already been outlined, institutional investors can be suited to sizeable rental projects such as the provision of large-scale student accommodation but they are not likely to be able to deliver properties for rent that groups such as families are interested in. Instead, it is the private landlord, operating in specific regions and able to move quickly, that is best suited to supplying these potential tenants.
Private landlords may have the ambition to grow their portfolios but the lack of finance options available in the past couple of years have hampered them. That said, the provision of buy-to-let finance is gradually improving and each month we seem to have a number of lenders either returning to the sector after a hiatus or actively looking at making their move.
Skipton Building Society recently returned to BTL for the first time since it pulled out in 2009. It is offering two 60 per cent loan-to-value products for both two and three years on fixed rates, direct and through a limited number of intermediaries.
There have also been new products from Godiva and Leeds Building Society and an increase on the maximum number of residential properties Aldermore will accept from two to three.
This is positive for the sector and a sign that building societies in particular feel BTL is once again a market worth being involved in.
Across the board, we have seen the number of BTL mortgages increasing. Specialist broker Mortgages for Business recently revealed BTL products numbered 298 in the first quarter of 2011 compared with 142 a year ago. This is not a staggering increase but a steady rise, which looks set to continue during the rest of the year.
If these new products and lender entrants reveal anything about the BTL sector at present it is the still very cautious nature of lending.
Many potential landlords would clearly like more high-LTV products to be made available and certainly new entrants offering 60 or 70 per cent LTV are probably not going to float their boat.
However, it is vital that lenders maintain this approach to BTL. Already, I have read press comments that suggest the market is being talked up again as an “investment for all”. Look at the product pricing and criteria and this is not the case.
If you need to stump up 25,30 or 40 per cent of a property’s value in order to secure finance, then you will hardly be categorised as someone taking a punt. With that amount of money invested in a property, you are going to need to fully understand the return you can achieve and also acknowledge this is a long-term investment.
The good news for professional landlords and potential new entrants is that demand for rental property is high and is likely to remain so. From our own perspective, our landlords are seeing rents rising, the quality of tenants improving and rental voids shortening. Some have suggested we are even on the verge of a societal change in the UK from predominantly owner-occupying to renting.
Large numbers of the population will certainly be renting in the years to come, particularly as it becomes more difficult to buy a first property.
The average age of the first-time buyer is creeping into the late 30s as deposit levels increase, plus we are on the verge of having a graduate population even more indebted than it has been in the last 10 years. It is possible that the average graduate will be leaving university with £40,000-£50,000 of debt at a time when jobs are at a premium and they will not have the savings to fund a housing deposit.
Renting will be the only option for the young professional and, if the Government’s much heralded take on social mobility is to occur, then we are going to need far greater numbers of available rental properties to meet the demand.
The underlying drivers for the private rental sector and BTL are strong. However, as a sector, we must be responsible and ensure we do not lose our common sense as the market becomes more attractive to lenders and landlords.
I hope the sector has learnt from the lessons of its recent past. All the signals suggest it has but one cannot legislate for the impact a lender might have if choosing to vastly increase maximum LTVs while loosening criteria.
This is not the case at present and the positives outweigh the negatives. With a Government that needs a stronger private rental sector for those who act responsibly and have the necessary finance, there should be lots of opportunities in the months and years ahead.