Private rented sectors differ massively across Europe, but reliable information on how the various markets operate has been thin on the ground.
Market data can be invaluable for mortgage intermediaries and lenders alike. Across the industry, the chance to map our market against others gives an important opportunity to identify trends and establish areas of best practice in individual countries.
That’s why BM Solutions has now produced the first study of its kind – comparing private rented sectors across Europe.
Diverse characteristics
We carried out research into the diverse characteristics of different countries in the EU, including the UK, backed up by online interviews with tenants and landlords in three focus markets. Our research produced key economic, housing and mortgage market facts on 12 EU countries. Even at this stage, differences between the markets were clear.
The average per capita mortgage debt in the UK, for example, is 60 times that of Poland. Yet although many people fear British home owners are overstretched, housing makes up just 18.7 per cent of their total expenditure, against 23.8 per cent in Germany, 24.1 per cent in France and 28.6 per cent in Sweden.
Britons may be famed for their property obsession, but home ownership rates are actually higher elsewhere. In the UK, 74 per cent of people are home owners, a figure equalled by Belgium but topped by Latvia, Greece, Ireland and Portugal. Spain comes top with an impressive 89 per cent.
However, renting is also far more popular in other countries.
More people rent privately in Poland than any other, closely followed by Germany. Our second stage research sought the views of landlords and tenants in these countries alongside those in Portugal.
Stark contrasts
The results reveal a stark contrast in how and why private landlords invest, driven by the cultural and economic differences in the various markets. Yet there are also some common themes.
Mortgage rates remain at historical lows across Europe, and this continues to fuel demand for property. In Ireland, for example, the average standard variable rate has fallen from 14 per cent in 1994 to as low as 3.3 per cent today. Between 1992 and 2003, rates in Portugal fell from 18 per cent to just 4.4 per cent.
These low rates continue to drive mortgage lending, particularly in France, Ireland, Poland, Portugal, Spain and, of course, the UK, where the mortgage market recently overtook Germany to become the largest in the EU.
However, continental Europeans tend to buy properties later in life than in the UK– if they buy at all. In Germany, 43 per cent of tenants have no intention of ever buying their own property, and among those who do, the average expected age to buy is 45. This compares to a more youthful 36 in Portugal and 34 in Poland.
A unique market
The UK offers more specialist mortgages than any other market, with an incredible number of products available, and 79 per cent of UK private landlords understand the requirement to purchase their rental property with a specialist buy-to-let mortgage.
However, the research suggests that the UK is unique in having a clearly defined concept of a buy-to-let mortgage. In Germany, 94 per cent of landlords don’t see any need to take out a specialist mortgage; neither do 92 per cent of landlords in Poland or 80 per cent in Portugal.
Continental lenders don’t offer specifically underwritten products for landlords in the same way. Personal – rather than rental – income is the key factor when obtaining mortgages to fund rental properties. In both Poland and Portugal, landlords reported that the personal income of the applicant is the most important factor in 68 per cent of cases – far more so than the likely rental income they would earn. Rental income is the deciding factor in just 4 per cent of cases in Germany and Portugal, and none at all in Poland.
Private landlords in the UK also value specialist mortgage advice more highly than their overseas counterparts. Some 70 per cent of UK landlords used an intermediary to organise their mortgage, compared to just 26 per cent in Germany, 23 per cent in Poland and a mere 6 per cent in Portugal. This is representative of intermediary involvement in their mainstream markets and reinforces the view that their rental properties are researched and purchased in much the same way as their homes.
Buy-to-let motivation
Far more UK landlords are likely to regard letting as their occupation. Although just 17 per cent currently view property as their main form of income, 48 per cent expect it to become so in future. German landlords aren’t as optimistic – 82 per cent don’t expect property will ever be their main source of income.
This complements the fact that the average UK landlord has a relatively large portfolio of five properties, more than double the average in Poland, at 2.6 properties, Germany, at 2.5 properties and Portugal, at 1.9 properties.
The prime motivation for investing in buy-to-let differs greatly according to the country.
In Germany, 66 per cent of landlords invest primarily for rental income; while in Poland 66 per cent are looking for capital gains. Perhaps the relatively immature Polish market properly offers greater opportunities for capital growth than Germany. But even as the UK housing market slows, the majority of landlords – 57 per cent of them – are investing for capital growth.
Voids and profitability
Every private landlord must prepare for void periods, when their property sits empty because they don’t have a tenant. This problem is ever more prevalent on the continent; investors in Germany report that their properties were empty for 89 days void in the last 12 months – effectively losing three months’ worth of revenue.
This compares to 63 days in Poland and 57 days in Portugal. These markets do not face the same lack of housing supply that characterises the UK – where average void periods are astonishingly low in comparison at just 15 days.
Consequently, profitability also varies greatly from country to country. Landlords in Germany earn the lowest profit after costs, with 30 per cent claiming to make a loss annually, 36 per cent breaking even and just 34 per cent turning a profit.
Compare this to Poland, where only 4 per cent of landlords make a loss and 81 per cent enjoy a substantial profit. Despite reports of a slowing market, 75 per cent of UK landlords make an annual profit, with 18 per cent breaking even and only 5 per cent experiencing any loss.
It therefore comes as no surprise that UK investors believe returns on property compare well to rival investments. Some 22 per cent of private landlords say it offers ‘much better returns’, compared to 21 per cent in Poland and a mere 6 per cent in Germany and Portugal. In fact, a third of German landlords believed that better returns were on offer elsewhere.
A long-term commitment
Encouragingly, landlords in each country see letting property as a long-term commitment. In Germany, the average landlord expects to be involved for 18.7 years, compared to 17.5 years in the UK, 16.4 years in Portugal and 13.9 years in Poland.
Differences are also evident in product choices. In line with their mainstream markets, 93 per cent of German borrowers opt for the stability of a fixed rate mortgage, compared to just 45 per cent in the UK. However, only 34 per cent of Polish landlords take a fixed rate, with nearly 49 per cent on a variable rate. In Portugal, where interest rates are on the up, just 12 per cent fix their rate.
The increase in numbers of those choosing to rent in the UK has meant that the average age at which people buy their first property is now well into their 30s. This may be an early sign of the emergence of a more continental mindset in the UK.
Our study has revealed sharp variations between the private rented sectors in different countries. It will help underpin the development of buy-to-let with solid numbers and strong market insight.
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