Buy to let is back

Posted 4 December 2009 by Cathy Moore

From The Times
November 27, 2009

Buy-to-let is back for cash-rich landlords only

Landlords are feeling more optimistic, but what are the long-term prospects for buy-to-let?

Susan Emmett

There is nothing like a housing market crash to test a landlord's mettle. The economic slowdown of the past two years has wiped out inexperienced investors, who plunged into buy-to-let too late expecting overnight riches. But the savvy, who took a longer-term view, have survived the worst of the recession and are feeling cautiously optimistic about the future.

Tenant demand is up, rents have improved and although many landlords are still feeling frustrated by the lack of credit, the buy-to-let mortgage market is expanding modestly again. Buy-to-let may still be some way from a full recovery but the long-term prospects for the rental market remain strong and landlords with money in the bank are taking advantage of reduced property prices and low interest rates to expand their portfolios.

"There has never been a better time to capitalise on the buy-to-let market," says Jim Parker, a landlord of 15 years and spokesman for the National Landlords' Association (NLA) in Scotland. "There is virtually no return from the banks, but there are some great bargains out there. Housing is in short supply and rents are increasing. If you have the deposit to put down, now is the time to buy."

Parker has bought three houses in the past six months to add to his portfolio of 37 properties in Fife. It was his first shopping spree in four years. "We stopped buying when prices started rising rapidly. It made no financial sense to buy at the height of the boom.

He is not the only investor snapping up bargains. Figures from the Council of Mortgage Lenders (CML) show that buy-to-let lending rose by 10 per cent in the three months to September compared with the previous three months. Most of that growth is the result of borrowing for house purchases rather than remortgaging.

Studies from the Royal Institution of Chartered Surveyors (RICS) and the Association of Residential Letting Agents (ARLA) also indicate a rise in the number of investors hunting property. Buy-to-let players are seeing positive returns from property for the first time since the credit crunch began, according to research from LSL Property Services, owners of several chains of national letting agents.

Those who bought in April 2009, at the bottom of the market, have reaped a return of 7.4 per cent in rent and rising prices, the equivalent to an annual return of more than 15 per cent. Even those who called the market too early and bought a year ago, have made a return of 2.4 per cent. The worst time to invest was February 2008. Anybody who bought then would have lost more than 11 per cent by February this year.

David Brown, commercial director of LSL Property Services, says: "October was a watershed month for property investors. The spectre of losses on their investments is finally being exorcised and they can look forward to property providing them with a decent return again."

The oversupply of rental property, caused largely by a flood of homes put up to let by owners who failed to sell, has vanished as the housing market picks up. Less competition from so-called accidental landlords has tipped the market in favour of the professionals once more.

The long-term prospects are also good. Some two million households rent through the private sector in the UK, according to ARLA and that figure is set to rise. Lucy Morton, president of ARLA and managing partner at W. A. Ellis, the London agents, says: "Demand for rental homes in Central London has been rising since May as the City starts to hire professionals from Europe and the US again."

The clamour for rental homes is also coming from potential first-time buyers who are still unable to secure a mortgage and former homeowners who have sold but have failed to find suitable new homes with so few properties on the market.

Farther down the line, ARLA predicts that the demand for rental homes is set to grow by 20,000 to 30,000 a year over the next decade, largely because of the rise in divorce, immigration and job mobility.

However, not all landlords are enjoying the benefits. The economic downturn is still claiming buy-to-let victims who borrowed too much and bought overpriced properties at the height of the market.

Many of those who invested late remain painfully overstretched and are unable to cover the cost of their mortgages. The CML statistics show that although there are fewer landlords in arrears, the number of properties taken into possession rose between July and September, from 1,400 to 1,600.

Tougher lending criteria imposed by the banks now makes it impossible for those who borrowed large percentages of the value of their property to remortgage and get the best deals. But even serious players are feeling frustrated by the lack of credit available.

James Fraser, a landlord of 13 years, wants to expand his portfolio of 20 houses in Stevenage for the sake of his partner Karen Smith and their five-week-old daughter Daisy.

Having started his portfolio in 1996 with the purchase of a one-bedroom flat for £12,000, he had plenty of equity to cushion the economic blows. "With interest rates down, I'm paying almost nothing on some of my tracker mortgages so profitability is up," says the representative for the NLA in Hertfordshire and Essex. "Estate agents keep offering me some great deals and I would love to be buying now but I can't raise the deposits banks demand."
 

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