The media is lining up its next scare story – that the buy-to-let (BTL) edifice is about to come tumbling down on the back of a growing number of new build flats that were sold to investors and can be neither let at an economic rent nor sold on without a big capital hit.
We’ve seen it in a couple of newspapers so far, and with the opportunity to spread a little more misplaced doom and gloom, there’s every chance that the story will get a few more airings.
It may make a few good headlines, but ignores two basic truths, which are that speculating on new build is not BTL, and that in any case this represents only a small fraction of the market.
No dynamic effect
To deal with the second point first, according to Council of Mortgage Lender figures, new build represents less than 5 per cent of BTL, and indeed inner-city flats make up only a proportion of that. Thus, whatever happens in this sub-sector of the market, it won’t affect the overall dynamics of BTL, which is driven by tenant demand, itself a function of ongoing growth in household numbers due to long-term demographic trends.
BTL is all about identifying a need for a certain type of rented property and filling that need – and, as we said, that demand is growing steadily. It’s not about buying a property on a speculative basis and hoping that a tenant may come along.
Established investors – and that often means people who’ve been in the industry for a decade or more – know pretty accurately what types of home will appeal to each type of tenant, where they want to live and how much they are prepared to pay. They also have a good idea of the number of other landlords with similar properties, so they can avoid being in a market that is swamped by over-supply. That could leave them in the uncomfortable situation of being unable to find a tenant at the right price and being forced to comprise on a lower rent or, even worse, leave it empty.
From experience, such landlords know that tenants prefer older properties in existing communities, which already have local amenities and good communications links. There is an established rental market for these homes, so that the landlord who knows, or takes the trouble to research the local area can be pretty sure how much he can expect to achieve in terms of rent.
A different market
New build is different. Typically pre-sold off-plan, there is no established lettings market and tenants are less familiar with these properties and the local environment. Some speculative investors have been induced to purchase – sometimes by property investment clubs – on the basis of incentives, rent guarantees or uncorroborated promises regarding rent achievable or indeed uplift in capital value over a certain period.
Indeed, in some cases non-professional investors hope to ‘flip’ the property, but discover to their cost that its value turns out to be less than what they paid for it – and indeed the loan outstanding on it – especially if the local market is flooded with properties in the vicinity.
In the industry, it is a matter of some concern that valuations of new build properties do not always reflect the actual resale value. For this reason, a number of lenders have been adopting an extremely cautious approach in terms of providing mortgage finance to new build, tightening criteria, restricting loan-to-value, limiting lending in certain areas, or avoiding it altogether. We have also worked with the legal profession and with surveyors to address the valuation and transparency issues.
Unwise decisions
But it must be stressed that this is a problem at the periphery of the property investment market. Without wishing to appear unsympathetic to the predicament to those who have bought new build properties without due caution, people can, and do make unwise investment decisions across all markets – investing in the wrong company on the stock market; saving your hard earned cash with a shaky institution; or buying a piece of furniture or work of art that turns out not to be the priceless antique or old master it was claimed to be. Unless we lived in the ultimate world of regulation, it is as impossible to prevent individuals from making an unwise property investment decision as any other.
Thankfully, however, this is the exception rather than the rule. The vast majority of the 2.8 odd million properties in the private rented sector are not new build, and they are successfully and profitably let – to tenants who value the flexibility and quality of rented accommodation in this country. With demand for rented homes certain to continue to rise, BTL as a whole will continue to flourish.
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