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As the private rented sector is poised for lift-off, we ask:

Is Buy To Let

worth considering as an investment?

By Jeremy Gates

A major expansion in Britain’s private rented sector is on the cards as major financial institutions, including banks, insurers pension funds and private investors prepare to invest billions of pounds into providing homes for rent.

With equities in such poor shape, interest rates at rock bottom and global financial systems dangerously stretched, bricks and mortar is becoming an increasingly attractive option as rents continue to climb. Figures from HM Revenue and Customs suggest that rather than millions previously being invested in property, investors are now ploughing billions into houses and apartments.

Jeremy Raj, head of the residential property team at City lawyers Wedlake Bell, says: “There has been a startling jump in purchases of UK residential property by institutional investors and private investors are likely to follow suit. Institutions are being attracted to residential property because of improving market fundamentals, including high tenant demand, high rents and a supply shortage that shows no immediate signs of abating.

“It will be interesting to see whether this sudden surge is able maintain its momentum in the years ahead. One area which has seen strong investment is the student accommodation market, both by UK and overseas investors.”

Rents rose for nine consecutive months to November, to an average of £720 per month. And Wedlake Bell says the shortage of homes in the South that is underpinning high rents is unlikely to be alleviated in the short term. Raj explains: “One effect of the last credit crunch was to freeze the new build pipeline, meaning the current shortage of properties on the market is unlikely to abate in the near term.

“Unsold housing stock from the new build boom prior to the credit crunch has now been cleared up, making the current shortage of quality rented accommodation more acute. The Government’s proposals to extend the Right to Buy scheme might actually mean that more affordable housing is taken out of the public sector.”

Wedlake Bell says that this acceleration of purchases by financial institutions in particular reverses years of low investment by them in UK residential property. If plans currently under consideration are fulfilled, this Government could build a reputation as the restorer of the private rented sector which rivals the triumph of Margaret Thatcher’s years in her massive build-up of owner-occupation.

One household in five in Britain could be in the private rented sector by 2016, says an analysis from agent Savills. Their research bulletin says: “The dramatic increase in demand for private rented accommodation since the credit crunch should provide an opportunity for large scale investment in the residential sector”.

By 2016, says Savills, Grade C stock in the North of England could be delivering an annual yield as high as 9%. Similar figures could be reflected elsewhere in the country if current property shortages and stricter lender criteria for mortgages continues. Another report in November from Grainger, the company which owns homes worth £2 billion and is Britain’s largest listed residential landlord, predicted half of all households in 15 years’ time could be living in rented accommodation.

Grainger estimates there are currently 3.3 million homes in the private rented sector, alongside 3.65 million rented from local authorities or public sector landlords such as housing associations. Recent activity in the property markets suggests that bricks and mortar is becoming an increasingly preferred option for those looking to make higher yields on their nest eggs than the current Savings and share investments offer.

All the ingredients for a boom in Buy to Let mortgages over the coming years are in evidence. With property prices still at a relatively low level compared to the pre-Credit Crunch era and Buy to Let mortgages now more easily accessible (loan to value (LTV) requirements from lenders now typically 75% meaning less capital is required to secure a Buy To Let mortgage), the private rental sector looks set to take-off. This in turn is predicted to stimulate increased activity in the property market in general which could then see property prices creeping up as demand rises.

Nobody has a crystal ball and in recent times the property sector has tended to be unpredictable but with increased interest from larger institutional investors in residential properties, all the signs seem to predict that this area could prove lucrative to those willing to invest now. The question a potential private Buy To Let Investor should ask themselves is “Is there a better time than now to take the plunge?”

22 Life Begins

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