The increased rents are a sign of the strength of tenant demand feeding through. The Index also showed rental yields at purchase are following a favourable trend. Having remained steady since spring 2006, they edged up slightly to 6.1% in February.
Buy-to-let landlords are actively acquiring additional rental properties to add to their portfolios, with intermediaries arranging the majority of the mortgages required to finance these property purchases.
Simon Tyler, managing director of Chase De Vere, said: “Professional landlords with significant portfolios and funding capability are seizing the opportunity to buy. They take a long term view of 15 or 20 years and know that we are not building enough homes to cater for the growing population, which is expected to reach 65 million by 2020. Everyone needs a roof over their head, and the influx of people from Eastern Europe is good for the economy and creates considerable extra demand for rented homes. The result of this is that the professional end of the market is particularly active building their portfolios at the present time.”
John Heron, managing director of Paragon Mortgages, said: “Across the board, the intermediaries through whom we originate around 95% of our lending are generating good volumes of business, which is reflected both in our own mortgage completions and those of the industry overall.”
Recently Paragon announced to the Stock Exchange that lending completions are over 30% higher during the current financial year than a year ago, and the current pipeline of new business is larger than it was in 2006. At industry level, the latest Council of Mortgage Lenders (CML) data showed buy-to-let volumes are 19.4% higher in the second half of 2006 than in the first half.
Notwithstanding these strong levels of activity, the evidence indicates that investors remain appropriately cautious and risk adverse.
Heron continued: “Landlords are by nature a prudent breed, they consider the financial implications of any new investment carefully, and tend to arrange their buy-to-let mortgage through a professional intermediary who can provide appropriate advice. Despite the availability of more generous criteria in the market place, in our experience the average LTV on a new buy-to-let loan is less than 80%. Across the typical landlord’s whole portfolio, the average gearing is consistently less than 40% and, indeed, is following a downward trend. Our latest landlord research shows average gearing at 37%, down from 39% last quarter. While the vast majority of landlords select a fixed rate loan, the current environment of rising interest rates may make them more cautious in terms of how much deposit they put down and how much borrowing they raise.”
As for the future, all the signs are that demand for privately rented accommodation will continue to grow, which will have a positive impact on rents and yields, and encourage further investment in the sector. Recently, the Department of Communities and Local Government (DCLG) forecasts for the growth in household numbers were revised upwards. The DCLG now expects an average of 223,000 households to be created each year in the period to 2029 (up from the previous forecast of 209,000).
Heron said: “I concur with Simon Tyler’s view that the UK buy-to-let market can only grow, on the back of the strong expansion in household numbers expected by the Government. Many of these new households will be formed by people living alone or by immigrants to the UK, who are much less likely to be in a position to purchase a home, and will therefore look for rented accommodation.
“Fortunately, there is a supply of investors who are willing and able to provide suitable homes to meet the accommodation needs of this growing number of households. Landlords expect the value of their portfolios to rise by 4.8% over the next 12 months."
