With forecasts of mortgage lending falling back by 15-20 per cent in 2008 it’s comforting to know that all the predictions for buy-to-let signal a continued rise in this sector of the market.
In 2007 it accounted for 12 per cent of all lending and predictions are that this percentage will continue to grow. The question I would ask is – will buy-to-let account for at least 12 per cent of your total lending in 2008? If not – why not?
If you don’t understand the market, then ask the people who do.
While clearly the buy-to-let market will not be a place for the first-timer in 2008, all the pointers are that the experienced landlord will be as keen as ever to continue to build on his investment portfolio.
How do we know this? Well, forward-thinking lenders constantly ask their clients what they think.
I have always been an admirer of the likes of Paragon, Mortgage Trust and Mortgage Express, which regularly survey landlords to get their thoughts and publish them.
This, coupled with quality information and marketing material that can be found on their respective websites, helps brokers not only understand the market better but through these surveys gives pointers for the future.
You may also like to visit the Association of Residential Letting Agents’ (ARLA) website, which is also an excellent source of information, which regularly publishes a buy-to-let review and index from a survey conducted with members.
What do the surveys tell us?
Tenant demand
Paragon in its recent landlord survey published in January 2008 stated that 27 per cent of respondants said that tenant demand is currently either booming or growing, with 66 per cent describing it as stable.
Furthermore 42 per cent of respondents said they believe that tenant demand will either boom or grow over the next 12 months, with 52 per cent believing it will remain stable.
This is also confirmed by the most recent ARLA report, which states that two-thirds of letting agents in central London report they have more tenants than properties, while 57 per cent of letting agents in the south east said the same.
This is in comparison to the rest of the country where 37 per cent of letting agents confirmed they were short of property.
So if those surveyed state that tenant demand is high, why would a landlord either want to sell or not want to buy more if they have the deposits to do it?
Portfolio plans
According to the buy-to-let confidence survey, recently published by Mortgage Express, a massive 86 per cent of surveyed landlords either plan to maintain or build their portfolio. 43 per cent said that they will increase their portfolio.
60 per cent of landlords said that they have no concerns regarding market conditions as they have conducted thorough research.
This is a point that all brokers should grasp. The professional landlord is not an individual who has not done his/her homework. They are less likely to be swayed by the continued adverse press comment on the demise of the market.
Voids
In the same survey, while you would have thought that due to the doom sayers these would have risen, in fact unplanned voids fell by 14 per cent in the last six months to 28 per cent.
67 per cent polled also said that their tenants are not in arrears which have remained stable. So if tenants are paying the rent why would they want to sell?
Rental income
But what if the rental income does not cover the mortgage? More good news here. According to Paragon, property in North Yorkshire had the highest percentage increase in yield at 9.6 per cent in 2007.
In fact North of Watford all areas showed an average rental yield of 6.3 per cent, which should be sufficient to pay a buy-to-let mortgage if the client is with the right lender.
Greater London comes out worse at 5.4 per cent, but when, according to the survey, property values rose by 33.5 per cent, you can’t have it all ways.
Clearly, moving forward, landlords need to be careful in their selection of properties to purchase, the days of buy any property, rent it out and profit have long gone.
However as stated earlier, the professional landlord does his homework and most know where the hotspots are.
Rather than just relying on surveys why not speak to a professional investor yourself to get their views on the market.
Professional investor advice
Alan Forsyth, a professional landlord I have known for many years, when asked about the market for 2008 said:
“While the average house price to income ratio is now nine, meaning the majority of the UK is if anything overvalued, there are still some regions and areas well undervalued – as low as four or five times on the house price to income ratio – which will prove to be excellent investments.
"While some investors like to target one-off houses which are below market value, I think it makes more sense to target whole areas where there are clear economic indicators that show they are undervalued.
"These areas offer very attractive figures for investors, yields as high as 7 per cent (the national average is only 4 per cent), local affordability is twice as high as the national average, and will clearly outperform the property market over the next five years – and this is already happening.”
Forsyth then went on to give this advice: “Keep looking at undervalued markets and regions with strong rental markets – and in general, steer clear of areas that have house prices greater than seven times the local salary – for most of the UK with average salaries of £20-25,000, this would rule out areas with prices higher than around £150,000.
"With some areas in the UK with house prices at just £80,000 there are some excellent opportunities. I expect my existing UK property portfolio to grow in value by 10-15 per cent this year – with the average ‘value’ still only around £80,000 this is still significantly undervalued – and I am looking to significantly increase the size of my portfolio this year. With 85 per cent leverage this will offer returns of over 60 per cent next year.”
Forsyth has built his portfolio predominantly with lower-priced second-hand properties rather than new build, as he knows the historic value and knows that there is a continual shortage of two and three-bedroom affordable houses to rent.
Up and down the country there are thousands of investors like Forsyth who will continue to build portfolios and see the current economic climate as an opportunity to grow their portfolios.
So if you haven’t got any of this type of client, I suggest that you go out and find them. Speak with local letting agents and offer a bespoke mortgage service to their landlords.
If you have got experienced landlords as clients, go back and see them, give them a copy of these surveys and get their opinion on the market. Through conversation it could open up other opportunities.
According to the Mortgage Express survey, on average a landlord has five properties. So, this year, if you set yourself the goal of finding just 10 landlords, think of the dramatic effect this will have on your mortgage business moving forward.
Landlords that are actively looking expand their portfolios will need advice; it is a simple fact that if you look after them, they will look after you.
It’s estimated that there will be nine billion buy-to-let remortgages taking place in 2008, and this will continue to grow each year as landlords look to maximise returns and instigate new purchases.
The buy-to-let market continues to grow, voids are stable, yields are rising and the majority of landlords have confidence in the market. While other sectors of the market might be diminishing there is light at the end of the buy-to-let tunnel.
