Strong tenant demand on the back of the growing weakness in the wider housing market has led to rental incomes accelerating in recent months. A series of interest rate rises has made it more difficult for first-time buyers to step on to the property ladder, so demand for rented accommodation continues to grow.
Over the past year rents are up 5.0 per cent but the majority of that growth has occurred in the past three months, which has experienced a 3.04 per cent rise in rental incomes. On an annualised basis, that equates to an annual growth rate of 12.7 per cent. Landlords’ ability to increase rents has enabled yields to remain consistent at around six per cent for the year.
Landlords are also benefiting from increased bargaining power when looking to add property to their portfolios. The price landlords are paying for property has risen by 5.5 per cent over the past 12 months, compared to 10.7 per cent in the general housing market. Total returns on a property purchased a year ago, including capital gains plus rental income, stood at 11.6 per cent in July. When gearing across a landlord’s whole portfolio is taken into account, the effective total return is much higher.
John Heron, managing director of Paragon Mortgages said: “Landlords are in a very healthy position. They are clearly seeking better value than residential purchasers and this is shown in the price they are paying for their property. Landlords are more experienced in negotiating down the price of a property than residential buyers and are also excellent at spotting those under-valued locations that will be the next ‘up-and-coming areas’.”
As global stock markets stumble, buy-to-let continues to be a popular choice for those seeking greater control over their investment. Paragon’s latest intermediary research indicates that brokers are dealing with the highest volumes of mortgages for over eight years. Intermediaries are dealing with an average of 26.1 mortgages per office, per month, up from 25 mortgages four months ago. Approximately 21 per cent of the mortgages they deal with now are buy-to-let.
The popularity of buy-to-let was recently confirmed by figures from the Council of Mortgage Lenders that showed buy-to-let mortgages accounted for a record 12 per cent of all new mortgage loans in the first half of the year. The buy-to-let market now represents 10 per cent of all mortgage balances, up from three per cent five years ago.
Heron said: “The strength of buy-to-let as an investment is really coming to the fore. The equity markets have been on a rollercoaster in recent weeks, which would have frayed most investors’ nerves and given them sleepless nights. Stock market investors have seen the value of their holdings severely dented in a matter of weeks.
“Buy-to-let doesn’t suffer from that volatility and it gives the landlord control over their investment - it’s a great counter-cyclical, long-term hold. Most landlords view buy-to-let as a long-term prospect and expect to keep their properties for an average of ten years - over which time they will benefit from regular rental income as well as the capital appreciation of the property. The consistently strong returns from buy-to-let continue to attract investors - a large proportion of these will be consulting financial advisers before taking the plunge and adviser confidence in the sector is at an all time high.”
