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Is the buy-to-let market really dead?

Is the buy-to-let market really dead?

Thursday, 29 January 2009 10:49 AM

By Sarah Garrod

With over half a million private landlords in England alone, the buy-to-let market is big business in the UK.

Buy-to-let itself, first introduced by the Association of Residential Letting Agents(ARLA), was aimed to provide a more flexible lending approach for those who want to invest in property to rent.

Mortgages were designed to encourage private investors and to make lending more affordable to them. But with the housing market crisis taking its toll on landlords, is there still a market for buy-to-let?

Research by ARLA released this month showed how despite the current market conditions, nine out of ten property investors said they wouldn't sell their property investments if house prices continued to fall.

Ian Potter operations manager for ARLA, says: "We weren't surprised by that find at all, because the majority of buy-to-let landlords are not in it for the quick fix solution. They are in it for the long term. A lot of them see themselves holding onto the property for a long time, as buy-to-let is seen as a medium to long-term project.

"In some areas the rental prices are actually going up, because the market is just so fragmented. Some landlords tell us their letting more properties in this January than they were in January last year.

"The main concern we are seeing raised by landlords at the moment is the fear of their tenants losing their jobs. But landlords can insure against that."

Mark Long, client services director at Business Development Research Consultants (BDRC), explains their latest research, covering the last quarter of 2008, has returned statistics never seen before and presented a picture of a market characterised by over-supply, reduced rental incomes and less hope of securing finance.

Mark also highlights the fate of landlords now depends on whether they are professional or amateur. The report distinguished between struggling 'amateur' private landlords (with between one and four properties), and 'professional' landlords (with 20 or more) who are enjoying higher profits in the current climate.

BDRC found that not only are 100 per cent of professional landlords making a profit, but they are also taking advantage of falling property prices, repossessions, auctions and 'sale and rent back' schemes to add to their portfolios. Amateur landlords by comparison are much less likely to be making a profit, 15 per cent with one property and seven per cent with two to four properties say they are making a loss at the moment.

Mark says: "The credit crunch has polarised the private rental market. Whilst professional landlords are able to cover their costs and expand their portfolios, the amateur landlords, many of whom 'fell' into letting by accident, are really starting to feel the pinch.

"Our research shows that thousands of private landlords expect to fall behind on mortgage payments in the next three months and a considerable proportion are likely to face repossession on one of their properties."

But letting agents say 2009 is not looking so bleak for buy-to-let, as people are choosing to rent rather than buy until the market recovers.

Caroline Kavanagh, group lettings director of Badger Holdings, parent company of Townends & Regents estate agents, says: "The good news is that properties are being let and the start to the year has been very busy and looks set to continue. Of course, there is more choice for tenants at the moment and, therefore, clients do need to be flexible on price and perhaps take a more long term view on the quality of tenant and, of course, avoiding 'downtime' is the most important issue.

"I would advise those looking to rent not to look at too many properties, as this can often end up confusing. Watch out for which agent you use as 'quality and professional that is part of a governing body' is a must.

"Don't be afraid to make an offer and, if you like something, take it. Any good properties will be snapped up quickly so time is of the essence."

While the housing market crisis may be providing greater choice for tenants and allowing them to be gutsier with their offers, landlords may be considering reducing the size of their portfolios rather than retaining empty properties.

Caroline says: "Unless a landlord has to release cash, there is no reason why they should decrease their portfolio size. Not only will they see the impact the decrease in sale prices has had but, on top of this, any landlord with a portfolio should always think long term. People will always need somewhere to live and right now applicants are seeking quality accommodation at a price that reflects the current market.

"Naturally getting the best return is at the forefront of landlords minds, however, so is the quality tenant. Landlords are increasingly wary of tenants being faced with job insecurity and the possibility of this having an impact on tenant affordability. Landlords need to have reassurance that they are as best protected as possible."

Caroline offers the following advice for landlords during the recession:

Be sure to pick a professional letting agent and avoid taking the view that lowest fees will save money. All too often problems are likely to occur when an agent disregards quality and replaces it with speed of getting a tenant in. Make sure that an agent has stringent referencing procedures in place and is a member of ARLA which can safeguard the landlord in so many ways.

It is best not always to think about getting 'top dollar' as this isn't always going to mean more money in their pockets. Taking a small decrease can often make their property more appealing to tenants and therefore secure someone quicker avoiding downtime also

Keep the property clean, tidy and don't spend too much cash on a refurb or fixtures and fittings when ultimately that is not necessary

Tenants are currently in a very good position to negotiate, and as a consequence, perhaps pay a more realistic rental price than this time last year. As supply in the rental market continues to outstrip demand, tenants are also able to shop around more, finding a wider choice of properties for their budget.

Last week aboutproperty.co.uk reported on the findings of the spareroom rental index, which found rising supply and waning demand for a place to rent had slowed prices in the final quarter of 2008.

Matt Hutchinson, director of research at spareroom.co.uk, says: "One of the main reasons for the increase in supply is people renting out a room to a lodger to bring in a little more income every month.

"There's more of a choice out there at the moment and the chances of getting a good deal are better than they were a year or two ago. In London it's been possible for a while to make an offer on a rental property if the rent is above your limit. Offers won't always be accepted of course but landlords would rather fill their properties than hold on for a relatively small amount of money. That said, if the landlord thinks you're taking the mickey then they won't look kindly on you.

"I would advise tenants have a good look and see what's on offer in the area they're searching in. If you think the rent is higher than average for the area then make an offer based on what it's worth to you."

With house prices now falling - over 16 per cent in the last 12 months - some property experts have warned there will be a shift in the traditional housing market structure, towards greater rented accommodation and fewer actual home-owners.

Matt says: "At this stage it's hard to tell if the downturn in the market is a blip or the start of a new property culture in the UK. It's certainly the case that in many parts of Europe people are happy to rent long-term and don't feel the same need to own their home as we in the UK do. We polled spareroom users last year and over half said they'd be happy to rent if there wasn't such pressure to buy."

The National Landlords Association represents five of the largest buy-to-let lenders in the UK and is the leading independent national organisation for private residential landlords.

Steve Hilton, spokesperson for the NLA, says landlords should consider using tenant checking services to ensure they are not high risk. Steve says: "Landlords who have access to funds are obviously in a good position to take advantage of the drop in house prices. There are bargains out there but professional landlords are still doing their sums before investing.

"Landlords are still looking at local demand for rental accommodation and current market rent levels before parting with their cash to increase their portfolios.

"Though the majority of professional landlords will have moved to protect their finances as the economic crisis has developed there are a small number of landlords who are struggling and need to rethink their portfolio.

"The current climate brings the threat of rent arrears, 71 per cent of landlords are expecting rental arrears to increase in 2009, and increasing regulatory costs which are all squeezing those small number of landlords whose whole game plan was to speculate in the rental market for the short-term. They are likely to be highly leveraged and have very tight cash flows. It is important that in these cases landlords actively look at how they can ease their way out of the market. More could be done to help struggling landlords in difficult financial positions exit the market without taking much needed rental properties out of the sector."

So is the buy-to-let market really dead?

Steve says: "There are still buy-to-let deals in the market but lenders are understandably looking to eliminate risks. Professional long-term landlords will frequently have good relationships with lenders that will help access to deals. But buy-to-let mortgages have historically had low loan to value levels, so landlords can expect to have to put in 25 per cent or more equity in mortgages.

"Landlords will also need to really show their business case for the mortgage, that they have done their home work in terms of what their local rental market looks like and that it can support the rent they are hoping to get."

Steve offers the following advice to landlords and their tenants who may be facing repossession in these uncertain times:

1. Get advice as early as possible from a reputable source about what your rights and responsibilities are. Tenants should make use of the advice services of the Citizen's Advice Bureau or Shelter. The NLA has an advice line and online landlord library for members which landlords can use.

2. Make sure you open all letters (for tenants: these are likely to be marked for the 'occupier') and make contact with the landlord or mortgage lender as early as possible. Too often communication starts once there is already a crisis. By talking about the problem early and whilst is it still a small problem, the conversation can focus on managing that problem.

3. If a landlord is facing repossession because of tenants incurring rent arrears, lenders may agree to renegotiate the mortgage to give the landlord time to legally gain possession of the property and get new, more reliable tenants.

4. If the tenant has been paying the rent regularly and reliably then they should talk to the mortgage lender about honoring the existing tenancy agreement and paying rent directly to them. Some lenders do appoint a separate company to manage the property on their behalf and this option allows the tenant to stay in the property till their tenancy has ended.