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Rents Continue To Rise

Friday, August 20th, 2010

The average UK rent is now £676, 2.3% higher than a year ago, according to the latest Buy-to-Let Index from LSL Property Services.

July saw the sixth consecutive monthly rise – 0.5% – following the increase of 1.4% in June. Rents are now just £12 per month shy of their peak two years ago. With the increase in rents, the average yield was 4.9% in July.

David Brown, commercial director of LSL Property Services plc, said: “Rents are still playing catch-up with the gains house prices made in the last year. The recovery in prices 12 months ago caused an exodus of accidental landlords from the market, ending the glut of supply of rental accommodation. Although house price rises have levelled off, landlords are still reaping the benefits of the constrained supply, and the improving yields have restored a healthier balance to the dynamics of property investment.

“And we don’t expect rents to fall away any time soon. With inflation well above the MPC’s target, interest rates can only go one way – north. When they rise, many landlords will face increased monthly mortgage repayments – and many will try to raise their rents to cover the difference.”

Arrears fell to 9.2% of all rent across the UK. This was a fall from 11.2% at the turn of the year, and is the lowest level since LSL Property Services plc began compiling the figures in 2008. In July, £212.9 million of rent was unpaid – a substantial drop from its peak of £361 million in August 2008. Just 434,803 tenants fell into arrears in July – 26,761 less than in June. The drop in arrears means that the average yield, adjusted for voids and arrears, was 4.5% in July – an increase from 4.4% in June.

Brown said: “There’s no evidence that the increase in rents has led to a surge in arrears. In fact as rents have risen in the past six months, arrears have steadily dropped. The key is the current tenant mix. Thousands of frustrated first-time buyers are staying for longer in the private rental sector. These tenants are in better financial state, and are better able to meet rising rents in full and on time.”

As a result of the recent declines in house prices, the total return from investing in buy-to-let over the last year dropped slightly to 10.1% in July. The average landlord would have made a total return of £15,961 in the past year, £8,706 in capital gains and £7,255 in rental income.

An investor buying property now could expect a total annual return of 3.5%, the equivalent of £5,838. The lack of house price inflation in the past three months means that if conditions remain constant, all of these gains will be driven by rental income, LSL says.

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Cash-strapped Landlords Struggling To Cover Mortgages

Thursday, July 15th, 2010

One in four landlords have admitted rents from tenants are barely covering their mortgage repayments and any interest rate rises could spell disaster, according to flat and house share website Spareroom.co.uk.

Research by Spareroom.co.uk found that 41% of landlords are only just meeting mortgage payments, while 43% said rents would no longer cover their mortgages if interest rates increased by 2%.

Some landlords admitted to standing even closer to the precipice, with 22% saying an interest rate rise of 1% would lead to rents not covering mortgages, while 10% said a rate rise of just 0.5% would create a shortfall.

The Bank of England’s Monetary Policy Committee has held interest rates at 0.5% for 16 months and is likely to maintain the rate for the time being. However, commentators agree interest rates must rise eventually.

Concerns over mortgage payments and potential rate rises have led 63% of landlords to increase rents in the past six months, with 21% admitting they have or plan to hike rents by 5% this year. A further 18% plan increases of between 3% and 5%.

However, over half of landlords said they are worried increasing rents could lose them loyal and valuable tenants.

Matt Hutchinson, director of Spareroom.co.uk, said: “Britain’s landlords are in a Catch 22. On the one hand, the rise in Capital Gains Tax for higher rate taxpayers means that many landlords either won’t be able to sell their buy-to-let properties full stop or will sell at a far greater loss. At the same time, holding onto their properties means they are at the mercy of the Bank of England and facing higher mortgage payments.

“For many landlords, it is hard to know which way to turn, and it could be that tenants feel the full force of landlords’ financial strain. The vast majority of landlords who have good relationships with their tenants don’t want to force the rent up, but for those who are struggling to make ends meet, it’s the only option.”

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Buy-To-Let Landlords Warned To Protect Against Tenant Troubles

Thursday, July 15th, 2010

Buy-to-let landlords warned to protect against tenant troubles
15 July 2010

With the housing market still in a state of flux and predictions that house prices may fall further, many homeowners who are looking to move may consider renting their property out instead of selling.

However, moneysupermarket.com has warned homeowners who are considering this option to make sure they take out adequate landlords insurance as standard home insurance policies become invalid once you earn an income from your property.

With tenant demand for residential property continuing to rise, the proportion of landlords planning to buy new properties increasing and lenders slowly reintroducing good value buy-to-let mortgages, the number of people becoming landlords for the first time appears to be on the rise.

Whether you are moving into buy-to-let for investment, or have decided to go down this route to move home, getting the contract and paperwork right is essential and having adequate insurance in place is a must.

Last year, one in three landlords had tenants in arrears, so Brits shouldn’t skimp on their insurance. However it doesn’t have to break the bank, with standard landlord insurance available from as little as £93 a year from simple insurance, which covers loss of rent. For £134 a year, acumus will provide landlords with cover for legal expenses should they arise from incidents such as repossession, tenant default, and debt recovery.

Julie Owens, head of home insurance at moneysupermarket.com, said:

“Whether you’re looking at buy-to-let property for investment, extra income, or because you cannot sell your house, it is essential to have sufficient insurance to cover any financial losses connected with letting out a property. I advise anyone contemplating becoming a landlord to seek advice and get all of the relevant information before taking this venture on.”

“Landlord insurance which includes Rent Guarantee cover or legal expenses can be more expensive, however if things go wrong between a landlord and tenant legal proceedings can involve a hefty cost. It is important to have a good contract in place to know where each party stands should the tenant and landlord relationship fall sour.

“I advise insuring yourself against these circumstances before they arise, it is always better to be prepared and there are a number of suitable insurance policies for landlords on the market. The varying levels of cover available means it’s essential to do your research and pick the policy that is the best fit for your circumstances, policy wording can differ so it is vital to check the small print to determine exactly what is covered.”

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Rents Predicted To Rise 10% In Next Two Years

Monday, July 12th, 2010

York has been named the most affordable city in the UK to share a flat, according to flatsharing website Easyroommate.co.uk, as it forecast that rents will continue to soar along with rising demand.

Research by Easyroommate.co.uk showed that the average amount people will pay in York to rent a room is £270 per month or 14% of the average monthly wage in the city.

Easyroommate.co.uk compared rents and earnings across the 55 largest cities in the UK and revealed that the average UK rent is £348 per month or 16% of the national average monthly income.

Southampton was shown to be the least affordable city to rent in, with 27% of the average income of £1914 being spent on rent which comes in at an average £516 per month.

Despite London having the most expensive rent in the UK at £551 per month, proportionally, it comes in as the second leas affordable city. With the average income in the city clocking in at £2594, flatsharers are paying around 21 % of their wage on rent.

All five of the most expensive cities to rent in were located in the South East, with Southampton and London followed by Guildford (£505 per month), Cambridge (£418) and St. Albans (£410).

However, St Albans was found to be the third most affordable city to live in due to the average monthly income of £2932.

The three northern cities of York (£270 pcm), Stoke (£275) and Hull (£287) were amongst the cheapest cities to rent in.

Jonathan Moore, director of Easyroommate.co.uk, said: “There’s a clear split between the North and South, but the South East is looking increasingly like a separate market entirely. The squeeze in supply of properties has been felt more keenly in London and its outlying satellite towns, where demand is highest and rents are in London have soared to double those seen in York. For the price of renting a room in the South East, prospective flatsharers could rent whole properties elsewhere in the UK.”

Moore predicted that demand for flatshare will increase as first-time buyers continue to struggle to access mortgages and unemployment rises with public sector cuts.

He said: “We expect the monthly rents to rise by 10% across the UK over the next two years, with an increasing gulf between the rental market in the South East and the rest of the UK. But despite the imminent public sector job losses, the financial services sector shows signs of recovery and more jobs are becoming available in London. As demand for accommodation from young professionals grows, we anticipate the cost of room rental in London to top £600 per month.”

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Rising Rents Provide Boost To Landlords Threatened By CGT

Friday, June 18th, 2010

The average rent in the UK rose by 0.5% to £667 per month in May, according to the latest Buy-to-Let Index from LSL Property Services plc.

Rents have risen for four successive months, and are 2.7% higher than a year ago. The average UK rent is now £18 per month higher than May 2009.

Rents fell by 2.7% in the North East, and 0.2% in the North West, bucking the national trend. In contrast, London rents rose by 1% to £924, whilst the West Midlands recorded a rise of 2.1% to £540 per month.

Yields on buy-to-let properties remained at their highest level since December 2009 at 4.8%, as rents accelerated faster than house prices. The house price for the average rental property snicked up by 0.1% compared to April, and registered an annual increase of 8.6%.

David Brown, Commercial Director of LSL Property Services plc, comments:

“House price increases have steadied, and rental income is now accounting for an increasing portion of a landlord’s total return. Rents have continued their upwards climb and are just £21 short of their all-time high.

“With the government likely to raise capital gains tax, capital gains may no longer be taxed more lightly than rental income. These measures could reduce the attractiveness of investment in the private rented sector, which would be a step backwards from financing the UK’s housing shortfall.

“But such a move would at least encourage landlords to take a more balanced view of rental income and capital gains in the sector. Total annual returns are being boosted by strong capital gains, but it is rental income that makes an investment plan viable and pays a landlord’s mortgage.”

The total return from investing in buy-to-let over the last twelve months hit 13.2% in May, rising from 12.8% in April. The average landlord would have made £20,363 in the past year, a combination of £7,100 in rent and capital gains of £13,263.

With house price growth now having levelled off, a landlord investing today could expect to make an annual return of 5.4% over the next twelve months. This is equivalent to £9,096 on a typical property in the UK. The majority of this would be in income rather than capital gains.

Tenant arrears grew in May, as £244m of all rent in the UK was unpaid – a sharp increase of £24m from April. This represents 10.7% of all rent. 508,600 tenants owed rent in May, an increase from 465,500 in April.

David Brown continues:

“Tenant finances have been in improving shape in 2010 and this drop highlights just how far they have come since the downturn. With the final three days of May falling on a bank holiday weekend, many payments were delayed until the Tuesday, leaving many landlords waiting into June for their rents. Even with this anomaly, arrears are 1% lower than the same time last year.

“The fundamentals of sound property investment, tenant demand, yield and rental income, are in place for the buy-to-let recovery to continue apace.

“But we need to wait for the budget. If the government proceeds with its short-sighted plan to impose a higher Capital Gains Tax on the private rented sector, it will risk bringing the recovery to a juddering halt – especially if neither taper relief nor indexation allowance accompany the hike.

“Without either of these, the new tax would penalise sustainable long-term investment, deterring private landlords and institutional investors alike.”

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Buy-To-Let Will Remain A Strong Investment, Even If CGT Rises

Monday, June 14th, 2010

Leaders, a UK letting agent, are confident that buy-to-let will remain a popular investment option, even if the rate of Capital Gains Tax (CGT) rises.

CGT is currently set at a flat rate of 18 per cent but there has been widespread speculation that this will be converged with Income Tax bands at 20, 40 or even 50 per cent under the new coalition government.

Leaders’ managing director, Paul Weller, says:

“The potential of buy to let to provide an annual rental yield, as well as to provide capital gains in the long-term, has long appealed to a wide range of investors and will continue to appeal as an enduring asset class.

“We do not believe landlords will act hastily in the face of a possible CGT rise. They know that buying to let is a long-term investment which brings with it a good chance of a capital gain – unlike many other assets classes – and after all, a taxed gain is better than no gain or a loss. Besides, assets other than property that achieve capital growth will also be subject to CGT.

“At the same time, with rents now rising as they are because of high demand, the income earned through property is likely to be much higher than derisory interest payments on any cash realised through selling an investment property, particularly as only the net proceeds after any CGT will be available to invest. Interest rates are currently around 1% whilst rental yields of 6% are now achievable.”

Mr Weller also points out that CGT only dropped to the current rate of 18 per cent in 2008; prior to that, when many landlords began investing, it was significantly higher.

For any landlords considering whether they should cash in on their investment ahead of a potential CGT rise, Leaders advise caution.

Mr Weller continues:

“Firstly, you need to consider where else you would put your money right now. As well as interest rates being so pitifully low, stocks and shares are no more enticing; you only have to look at what is happening to BP, a blue-chip British company whose share price has almost halved over the last 6 weeks, and who may consider suspending dividend payments. Property values tend to rise over the long-term making bricks and mortar a more solid investment.

“Secondly, your rental property may have increased in rental value over the last few years; we have seen rents gradually rising and if you have been renting your property for some time and not had it valued recently you may be pleasantly surprised by the rent it can command in the current market.

“At Leaders we will be happy to give free, impartial and expert advice on your property’s rental value and we are not conflicted by the possible sales fee an estate agent may be considering if your property is sold.

“Thirdly, for anyone thinking about selling their property before any CGT rise and then re-investing in a new buy-to-let property, they need to bear in mind the dual transaction costs and stamp duty that may be payable on the new property. Any potential savings on CGT would need to outweigh these costs to make this course of action worth taking.”

Whilst Leaders does not believe that an increase in the CGT rate will cause sensible landlords to dismiss buy-to-let or cash in their chips, the firm is concerned about the disconcerting short-term effect the uncertainty of a possible rise is having on the market, which currently needs more investment.

Mr Weller adds:

“We have written to the Housing Minister ahead of the Emergency Budget on 22nd June urging the government to dispel the uncertainty over CGT and to give careful consideration to the UK’s private landlords.

“The Private Rented Sector (PRS) currently accommodates 13% of UK households and needs nurturing if it is to continue to provide a good choice of homes to the millions of people who either choose to rent, or rent because they are unable to buy. We are seriously concerned about the current shortage of good quality property available to rent and urge the government to do all it can to encourage new investment in this sector.”

Mr Weller points out that with demand outstripping supply, rents are rising and more tenants and would-be tenants are finding rents increasingly unaffordable. This situation will worsen if investment in the sector is not encouraged.

Mr Weller concludes:

“If there is to be an increase in CGT we would urge the government to ensure that suitable concessions are introduced alongside. Many private landlords are not wealthy people, but ordinary individuals who have chosen to invest in property to provide for their retirement so that they will not be a burden on future taxpayers.

“It would be wrong for them to be penalised by the tax system for doing so. If CGT rates do rise then appropriate concessions, such as generous taper relief, that will support long-term investment are essential.”

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Landlords Need To Be Wary Of Income Tax

Tuesday, June 8th, 2010

The Revenue is scrutinising the income tax paid by landlords and ownewrs of buy-to-let properties, according to Chris Maddock, head of private clients at Vantis. “Capital Gains Tax is not the only tax that all landlords need to be very wary of,” he said. “HM Revenue & Customs has been taking a very close look at landlords with buy-to-let properties and their payment of income tax.

“If the property is on a repayment mortgage then income tax is calculated by only deducting from the rent the interest element, not the capital. Many owners of buy-to-let properties ensure the rental income covers just the mortgage, thinking they are making no profit, but are unaware that if capital is being repaid then there is income tax to be paid on this as well.”

He said anyone not volunteering the income tax when it is due faces fines and interest, on top of the extra tax bill if they are found out. “When caught, not only would the tax have to be paid, but there would also a fine and interest would be payable – potentially an unpleasant bill to face!” said Maddock

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Tenant Demand ‘Set To Soar’

Thursday, May 27th, 2010

Tenant demand ’set to soar’

25 May 2010

Belvoir Sheffield reveal 23% of chartered surveyors reported a fall rather than a rise in the number of new landlord instructions in the second quarter, up from 18% in the previous quarter, indicating that tenant demand could increase to aberrant levels.

Rick Flay, Director at Belvoir Sheffield, said:

“Here at Belvoir Sheffield we are seeing proof that tenant demand is certainly increasing, to the point where we are seeking out new properties in Sheffield and the surrounding areas.

“We are urgently looking for one and two bedroom flats in Sheffield, along with one and two bed terraced houses in the S1, S2, S3, S7, S8, S10 and S11 postcodes, after a significant increase in tenant enquiries.”

With critics pinpointing the sudden upturn in the housing market as a large factor, many accidental landlords have been tempted away from the lettings market.

First time buyers unable to get a foot on the property ladder are still a major source of increasing demand for good rental properties, with houses remaining more popular than flats, causing a supply/demand imbalance which is also helping to increase rental expectations.

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Professional Landlords Want To Fix

Wednesday, May 19th, 2010

Andy Young, chief executive at TBMC shares his views on the current Buy to Let mortgage market, the factors affecting product choices made by UK landlords and the trends observed in TBMC’s latest Landlord Profile Tracking Index.

Andy Young says:

“Whereas more residential mortgagors appear to opt for variable rates (4 out of 5 in Q1 2010 according to John Charcol), professional landlords running tightly controlled businesses are just as inclined to fix their expenses, demonstrated by the near 50/50 split in Q1 2010 between fixed rates and tracker rate applications.

“News of higher than expected inflation figures and some speculation that the US Treasury will increase interest rates may have influenced this decision. The more even split between fixed rates (52%) and tracker rates (48%) is a dramatic change to the previous quarter when 70% of applications were for trackers.

“This is an interesting trend as rates over the last three quarters have fallen consistently, with the average tracker rate offered over 0.75% cheaper than the average fixed rate, but the tracker rate has the added risk of rising beyond the fixed rate if interest rates rise.

“The increases in inflation have brought into question the Bank of England’s policy of keeping base rates low and there is now strong speculation that interest rates may have to rise next year to counter the inflationary pressure.

Purchases still dominate but remortgages may return

“Purchases continue to dominate the lending in the Buy to Let mortgage market; 59% of all Buy to Let applications received by TBMC in Q1 2010 were for purchases. However this is a fall from the 69% and 66% in the previous two quarters, suggesting that we may yet see growth in the remortgage market due to lenders increasing their SVRs and the prospect of interest rate rises in general.

Applications for trackers more likely to succeed

“It is interesting to compare the product type split from application through to offer. 56% of offers were for trackers compared with only 48% of applications which indicates that more applications for tracker rates are reaching offer stage.

“It is likely that a greater proportion of those remortgaging are opting for the security of a fixed rate even though it may be slightly higher, whereas a larger proportion of purchasers are looking to borrow as much as possible which requires applying for the products with the most achievable rental calculations.

“In Q1 more remortgage applications were for fixed rates (57%) whereas more purchase applications were for trackers (52%). Therefore if more trackers are affordable which they have been in the last quarter, and therefore fit the lender’s rental requirements more easily, the propensity for applications for trackers to be successful is greater.

Property speculators retreat from the Buy to Let market

“In any industry where gearing is available at rates cheaper than the current return, entrepreneurs will seek higher levels of funding to increase levels of profit. Therefore it is not surprising that the largest band of landlords (32%) is seeking 70-75% LTV, but the majority (68%) require much less.

“This indicates that there are now fewer property speculators in the Buy to Let market looking for a get-rich-quick scheme, and who almost certainly contributed to the poor Buy to Let arrears rate reported last year, but that the majority of the UK’s residential property investors are professional landlords looking at longer term investment and with a much lower LTV across their portfolios.

“This is good news and will help to ensure the availability of good quality rental accommodation and promote stability in the Buy to Let market.

The problem of down-valuations is abating

“Following the pick-up in the housing market and the recent increases in house prices, we have seen average loan sizes for Buy to Let mortgages increase. We have also experienced fewer down-valuations in the last quarter which suggests a more stable housing market.

Women continue to see Buy to Let as a worthy investment

“It is encouraging to see that the number of women investing in Buy to Let property remains high and appears to be on the increase with 44% of offers being made to female applicants, up from 39% and 41% in the previous two quarters.

“The NLA Property Women Awards has been running for a few years now, helping to raise the profile of Buy to Let property investment opportunities and recognising the achievements of women in this sector. It is too early to say whether this is a continuing trend, but we will keep our eye on it and report again after the next quarter’s results.”

Buy to Let mortgage market still lacks competition
“The number of lenders in the Buy to Let mortgage market remained fairly static in the last quarter with two lenders accounting for over 80% of Buy to Let applications through TBMC. This means that there is still very little competition in the market and it will take the return of some key specialist Buy to Let lenders with an appetite to lend to help stimulate growth and product innovation.”

Buy to Let appeals to the younger generation

“During the early years in the Buy to Let market, it was widely held that the average landlord was male and over 40. While this demographic still defines the majority of landlords, the profile of a typical landlord now has a much wider spectrum and our latest survey results indicate that a growing number of younger landlords have entered the market.

“33% of applications in Q1 2010 were from people under the age of 40 which is a slight increase on the previous quarters at 26% and 27%.

“It remains to be seen whether this is a growing trend, but it bodes well for the rental property sector. A wider range of landlords can provide a wealth of experience and knowledge in the Buy to Let market, helping to maintain the successful provision of quality rental accommodation to the diverse mix of tenants in the UK.”

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Growing Proportion Of Landlords Planning To Purchase

Wednesday, April 14th, 2010

Growing proportion of landlords planning to purchase
14 April 2010

A growing proportion of landlords are planning to purchase residential property for investment purposes, Paragon Mortgages’ PRS Trends Report reveals.

The quarterly snapshot of the private rented sector and buy-to-let market shows that 12% of landlords are planning to purchase in the second quarter of 2010, compared to 10% who said they would buy in the first quarter of the year.

Of those planning to purchase, terraced housing is the preferred option, with just over two thirds of landlords (67%) intending to purchase this type of property, followed by semi-detached housing (25%).

Nigel Terrington, Paragon Group chief executive, says:

“Demand for property investment has remained strong during the recession and has improved since house prices stabilised. Landlords know that the long-term forecast for tenant demand is extremely healthy, with socio-economic and demographic changes leading to growth in the number of households calling the private rented sector home.

‘Government figures show that the private rented sector is the only housing tenure that is currently growing. The proportion of households in both owner-occupation and social housing was in decline for the best part of the previous decade, and the private rented sector has picked up the slack. One in seven households now lives in privately rented accommodation.”

The Q1 2010 PRS Trends Report, which covers the three months to March 31, also shows:

- Tenant demand remains strong, with 24% of landlords stating that demand grew during the quarter, compared to 8% who said it was declining. The proportion of landlords stating that tenant demand was declining was lower than the previous quarter, when 13% of landlords said tenant demand was falling

- Looking forward, landlords expect tenant demand to strengthen considerably, with nearly four out of 10 landlords (36%) forecasting demand for their property to be higher in 12 months’ time

- The average portfolio value increased for the second quarter in succession, rising by 6.1% during the period to £1.52 million. This figure takes into account both property values and sales and acquisitions, so it could be a sign of landlords adding to their portfolios, as well as firmer house prices

- Landlords expect the average value of their portfolios to be 1.2% higher in twelve months’ time

- Access to mortgage finance remains an issue. Of those who attempted to secure mortgage finance for purchase or remortgage purposes, 82% said it was more difficult compared to the previous quarter, with 7% stating that it was easier

- Yields were 6% during the period. Yields, a portfolio’s annual rental income as a percentage of its total value, had been rising since the first quarter of 2008. However, for the past three quarters the figure has bounced between 6% and 6.2%

Nigel Terrington adds:

“Landlords are in a strong position. They are enjoying unprecedented levels of tenant demand, and structural changes taking place in the UK will create further demand. As the Royal Institution of Chartered Surveyors recently highlighted, this is leading to higher rental income.

“Whilst this is positive for existing landlords, it emphasises the vital need to expand PRS supply. Supply is being inhibited by a lack of available mortgage finance and there is a danger that households could eventually be priced out of the sector.”

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