Reports of the death of the buy-to-let landlord appear to have been exaggerated – at least according to the latest ARLA report. According to ARLA, the first quarter of this year saw more agents reporting landlords buying than selling, for the first time in two years.
ARLA surveyed 535 letting offices and 388 landlords, so the survey represents a reasonable sample of the market. And its message seems to be borne out by agents and developers. Dean Markall, Sales and Marketing Director of Hillreed Homes, which operates in Kent, Sussex and Hampshire has noticed a positive trend developing in the market.
“In the last four months,” Markall says, “we have seen an increased number of professional investors often buying more than one property at a time. At one of our sites in Kent a landlord actually purchased six apartments all of which are now let. Our experience is that professional buyers believe that now is the right time to buy and that the tide is turning.”
However, looking at the further detail of ARLA’s survey, the shift in the market doesn’t appear conclusive. On balance, rental levels were lower on all types of property, which is bad for the hard-pressed landlord. Voids were up, from 27 to 29 days – that’s the highest level for four years.
And the evidence on landlords’ buying is not quite as strong as it looks. Only 8.2 per cent of members said that landlords are buying more properties than they sell. And while only 4.7 per cent said the reverse, that leaves the majority of respondents to the survey uncommitted on the question.
Oversupply is a reality
So what is the real state of the market? There’s no doubt that the rental market in most places is now oversupplied. That comes out quite clearly in ARLA’s numbers – 77 per cent of agents in central London and 66 per cent in the rest of the UK, believe it’s the case.
Jon Neale, Head of Development Research at Knight Frank, says this is partly due to ‘forced landlords’. “People who can’t sell their properties are renting out, and so there is a massive amount of supply on the market.” Some developers, too, are renting out property if they cannot sell.
To that, Daniel Lee, CEO of Globrix, recently suggested you can add homeowners who have decided to let out their property and downsize – renting a smaller place, or a property in a less expensive area. Again, that increases the rental stock available, particularly at the higher end of the market.
There is also a problem in some areas where developers have flooded the market with new properties. While any area where a high number of new build flats have come on to the market will be vulnerable, Jon Neale thinks that’s particularly the case where the type of property doesn’t meet the real demand. For instance, where development has focused on small flats, but the demand is mainly from families, rental occupancy is likely to be low and landlords may have to reduce their rental levels in order to achieve a letting. Generally, Neale advises, “You shouldn’t buy where there is a lot of stock.”
Dean Markall too says, “Rental incomes in certain areas have dropped due to an oversupply of rented properties.” However, this varies from location to location, depending on the amount of property available. In the south-east, he says, the better locations remain robust.
The high availability of rental properties has led to an increasing number of agents opening lettings departments, as well as the growth of lettings franchises such as Martin & Co. Jon Neale believes many estate agents may now be using their lettings sides to let out properties that clients can’t sell – at least it’s keeping the client with the agency.
However, increased supply is bad news for landlords, since it has led to falling rents. It is definitely a tenant’s market now. Knight Frank’s research shows rental growth in London was already weak in the first half of 2008, rising only 0.7 and 0.6 per cent in Q1 and Q2 2008 respectively, and now, rents are headed down. In the first quarter of this year, rents in prime central London fell 7.4 per cent in the quarter, and 18.2 per cent year-on-year and are now at levels last seen in September 2000.
Top end suffering most
It appears to be the higher end of the market that has suffered the most. Knight Frank’s London review shows that the higher priced London rental properties were those which suffered most last year, with a 15 per cent fall in rents for properties let at over £2500 a week.
Jon Neale says “The top end of the market is in trouble at the moment. People just aren’t renting these properties.” Even those who can afford top end properties are now cutting their outgoings. And since the City was the engine of the prime market, now that City bonuses have disappeared and City jobs are being cut, the prime market is looking very shaky.
This is borne out by research published by internet classified ads site Gumtree, which showed that it was the most prestigious areas of London, Bristol, Oxford and Manchester, that were worst affected. Lower-rent areas, by comparison, showed more stable rental levels.
Jon Neale says “It’s the lower end of the rental market that is least affected by rental falls and yields have risen as prices have fallen most, while rent has remained robust.” The market is strongest for the cheapest properties in the better locations.
Relatively strong yields
One thing that does seem to be clear is that there’s been no great fall in demand for rental property. While the housing market is currently suffering from the double whammy of oversupply of properties and a fall in the number of purchasers, the rental market has seen demand relatively stable. Gumtree trends analyst Trisha Routledge said of the survey, “It’s clear that demand for rentals is still strong, which is driven partly by people seeing renting as an increasingly attractive option in the uncertain economic climate.”
That continuing strong demand is probably one major reason that professional landlords are looking at expanding their portfolios right now – and taking advantage of lower property prices to do so. Another reason is the gradual increase in gross yields.
In 2003, gross yields stood at over five per cent, with the bank base rate at between three and four per cent. Rental yields fell continuously, to four per cent in 2007, but according to Knight Frank they are now rebounding – though declining rents have moderated the increase.
It’s in the new build market that yields have increased the most, as the declines in price have been most pronounced. Jon Neale says that, “In the new build sector in particular you can get yields approaching double figures, if you buy at the right price. Developers have to sell their units in a specific timeframe, to make their cash flow, so they will reduce their prices for a quick sale.” Most homeowners, on the other hand, aren’t forced to sell, so they can wait the recession out or hang on.
ARLA is now looking at average rental returns on both houses and flats of between four and five per cent, with an average of 4.8 and 4.9 per cent respectively. That isn’t higher than the 2003 level, but it now compares to a bank base rate at 0.5 per cent – though the cost of financing won’t be that low, any landlord with cash sitting in the bank will see a positive return from investing it, which hasn’t been the case for some years.
Jon Neale says though that yields could still have some way to rise. “Yields have increased a few percentage points, but we’re nowhere near the levels we saw in the early 1990s,” he says.
The voice of caution
While buy-to-let looks tempting at the moment, there are still voices of caution in the market. David Anderson of lawyers Sykes Anderson says that he is worried by employment figures – particularly by the falling graduate intake of professional firms in the capital. “I think in London one of the things that will hit this market most is the absence of trainees being recruited by the big law and accountancy firms,” he says.
He points out that while cancelled or deferred graduate contracts may not strike most people as a major issue for the property market, it will result in the absence of high-earning young people who would naturally be renters for a couple of years before purchasing a property. Demand simply will not be there to replace existing renters as they move into their own properties. Anderson expects this to become a major problem come the end of August and beginning of September.
The numbers involved are large. Price Waterhouse Coopers for instance would take on 250 of those trainees; multiply that by 50 big players and that’s 12,500 potential tenants, of which a significant proportion might be taken out of the market. Landlords who are already under financial stress could find themselves needing to sell – which could mean there will be some good bargains towards the end of this year.
There is a severe restriction in the availability of buy-to-let mortgages and remortgages, and the National Landlords Association believes that 37 per cent of landlords are experiencing rental arrears, adding further financial pressure.
Jon Neale says, “Smaller buy-to-let landlords are in severe difficulties, particularly if they haven’t got much equity in their portfolios; remortgaging is a real problem. We’ll see more stock from them coming to the market over the next six months.” That’s particularly true for landlords who bought stock at the top of the market, on the maximum loan to value, and will find it difficult to remortgage since valuations have dropped significantly.
Expanding those portfolios
But, Neale says, the professional larger landlords are looking to expand their portfolios. Typically, the professionals are looking at repossessions and auction stock, rather than buying in the market. Some are also buying from developers in distress.
They can look forward to a busy year. The Council of Mortgage Lenders reported last month that 40,000 houses were repossessed in 2008. This year, the CML forecasts 75,000 repossessions – nearly double the number. Anecdotal evidence suggests many of the properties turning up at auction are newbuild flats, selling at as little as half the original price.
Dean Markall says the type of investor in buy-to-let property has changed. “The individual personal investor is no longer able to finance the deposit required under the current lending criteria in the buy to let market,” he says. The demise of property clubs and syndicates has also taken out smaller buyers out of the market.
UK landlords have seen an average 20-25 per cent fall in values from the peak, with some properties falling as much as 50 per cent. However, UK property has become even more attractive to Euro-based buyers who can cash in on the weakness of Sterling. David Anderson says “The people looking at UK buy-to-let tend to be those with Euro denominated assets who are prepared to accept lower yields.”
Whether the buy-to-let market is going to recover in the near future is uncertain. But there certainly appear to be some bargains out there for landlords who are prepared to do the hard work of researching the market – and there are enough landlords looking for those bargains to keep the auctioneers busy.
Meanwhile, lettings agencies are busy. Jon Neale says “We’ve got the highest level of lettings instructions we’ve ever had – and we are securing more tenancies, too.”
