some new entrants in the buy-to-let sector. More financial institutions will be willing to lend at 80% LTV and we’ll see restrictions on the number of properties in a portfolio rising and the permitted size of property portfolios increasing. Competition will, once again, drive developments.”
Welcoming the new entrants, Tracie Pearce pinpoints the areas of the sector where she sees the most interest, when saying: “It is anticipated that the market is likely to remain focused on low/mid-range LTV and smaller portfolio investors.” Mark Long, Director at BDRC Continental, wants to see greater competition. “Landlords tell us that they aren’t yet seeing a great deal of differentiation across the various product offers in the marketplace, so let’s hope that both new and existing buy-to-let lenders are able to add some ‘bells and whistles’ to new product launches.”
Rental demands Almost every month last year saw reports of impressive monthly rental returns and this trend is set to continue. A view shared by Charles Haresnape: “The difficulties being experienced by first-time buyers will mean that renting rather than buying will continue to be the norm for young people; we may even be seeing the start of a permanent shift to a more European model in which renting becomes more popular than home ownership.”
Despite a small monthly decline in November, the Buy-to-Let Index from LSL Property Services plc has reported that in the 12 months up to that point in time, rents have risen in all regions. The monthly analysis of over 18,000 properties across England and Wales identified the fastest rising rents on an annual basis were in London and the South East, where rents rose by 4.2%. The smallest rises were in the North East and the South West. Like Charles, David Brown, Commercial Director of LSL Property Services, believes that monthly returns will remain high. “The limited supply of rental accommodation means there will still be strong upward pressure on rents in the early part of 2012,” he said.
It is expected that rental arrears will increase in 2012 - hardly surprising given the continuing challenges facing the UK economy - as more tenants face the possibility of employment and pay being negatively affected. That said, there are reasons for optimism, as David Brown commented: “We're still seeing the impact of a changed tenant mix, which is helping keep arrears below historic levels. A large
proportion of current renters would be credit-worthy buyers were they able to provide a big enough deposit to satisfy tight mortgage lending criteria. These tenants are typically financially sound, and less likely to experience payment issues.” Tracie Pearce, concurs, adding: “New and existing landlords will be attracted by relatively low house prices, rent increases and low void periods. Uncertainty surrounding the performance of other investment vehicles and low savings interest rates will continue to make buy-to-let attractive.”
The regulation debate Continuing debate over any potential regulation in the buy-to-let sector always raises concerns. It is encouraging that the new mortgage restrictions designed to stop borrowers falling into arrears recently proposed by the Financial Services Authority exclude buy-to-let landlords. That said, there are fears that the Prime Minister’s recent Euro treaty veto may have scuppered the fight to block the regulation of buy-to-let loans under the draft European Union mortgage directive. Under the directive, buy-to-let becomes a consumer loan and subject to the same underwriting as a residential mortgage. Lenders fear this will mean landlords will have to show they can afford to pay the loans on property investments from their earnings rather than projections based on the property’s rent.
What this would mean in real terms is that growth in buy-to-let would grind to a halt as few landlords could afford to finance their own homes and rental properties from their salaries. The rule would also prevent existing landlords from remortgaging. Most of the buy-to-let mortgages that do run into problems - be it falling values or a lack of tenants - are suffering because the property was a poor choice. The simple truth is that by regulating a buy-to-let loan these problems would not be avoided.
Professional approach 2011 was definitely the year of the professional landlord, a trend that looks set to continue during the next 12 months. As Charles Haresnape said: “At the moment it is rental yields rather than capital gains that are attracting investors to the buy-to-let market and the continued growth of this sector will primarily be underpinned by demand from professional landlords. Investors are coming back to the buy-to-let market, but we’re not going to see a return to the pre- credit crunch days.”
Looking further ahead, a recent Intermediary Mortgage Lenders’ Association (IMLA) survey found that its members expect intermediaries to hold 82% of the buy-to-let market by 2016. Charles Haresnape shares this positive view: “I think intermediaries are doing a good job helping both potential and existing buy-to-let investors. Brokers are well aware that the buy-to-let sector is one of only a few growth opportunities in the UK mortgage market and they are keen to capitalise on opportunities to help potential investors,” he said. Tracie Pierce, highlights the value of brokers further. “The professionalism of the buy-to-let intermediary is essential to the success of the sector. They ensure that their advice provides the right product to the right investor through their specialist expertise in the market combined with knowledge of their customer’s requirements.”
Like 2011, the next twelve months will probably see increasing numbers of ‘reluctant landlords’. During the third quarter of 2011, nearly half (47%) of Association of Residential Letting Agents (ARLA) member agents surveyed reported a rise in the number of ‘unplanned’ lettings, a figure that has risen from 40% at the beginning of the year. According to ARLA, this means some homeowners will be turning landlord for the first time, many reluctantly. These reluctant investors would benefit from expert advice and so provide brokers with further opportunities to engage with the buy-to-let sector.
Increasing the broker’s role Mark Long believes that brokers could expand their role further, when saying: “We see an opportunity for specialist buy- to-let intermediaries to consider issuing landlords with a more holistic advice- based service around regulatory obligations, maximising income, avoiding voids and arrears etc.”
So while no one expects a booming buy- to-let sector to emerge, the broker’s continuing role and the key factors that drive growth remain; at least to some extent. Most commentators expect house prices to climb over the longer term and very few would argue that rental income will decline by any great amount. If rental income can continue to support buy-to-let landlords in the short term then the capital gains that attracted many investors to enter the sector in the first place will once again emerge. Given increasing product choice, against a backdrop of weakening property prices and strong rental demand, buy-to-let investor numbers will continue to grow.
February 2012
READERS ARE REMINDED THAT BUSINESS MONEYFACTS IS COPYRIGHT
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