Paragon said the private rented sector remains buoyant and the expectation that borrowing costs will rise again, following the quarter-point increase in rates, will contribute to further growth in the number of people in rented accommodation.
John Heron, managing director of Paragon Mortgages, said: “Rising borrowing costs deter many people from committing to buy a home, as they defer their property purchase decisions until the interest rate outlook becomes clearer. Instead, many will choose to rent from a private landlord, leading to a further expansion in tenant demand for rented properties."
This sustained tenant demand leads to an upward pressure on rents, which in turn provides landlords with the incentive to grow their investment portfolios. Rents have risen by 12.8% in the first six months of 2007, reaching £10,938. Over the same period, property values have risen by 10.5%, from £162,776 to £179,793, based on Paragon Mortgages’ July buy-to-let index.
Yields remained stable at 6% throughout the past year, a level at which investors generate an attractive return relative to their level of borrowing, which averages at less than 40% across investors’ portfolios.
Heron continued: “As intermediaries in the buy-to-let market will know, there continues to be a good level of investor activity, despite the fact that loans are becoming more expensive. This is ample proof that at these yields landlords are confident of generating an acceptable return over the medium to long-term – the typical investment horizon for a landlord being 10 years or more.”
“However, landlords also remain cautious and buy only if an investment makes sound commercial sense. Generally that means buying in well-established communities with good local amenities and an established track record of sustained tenant demand. This is not the time for speculative investment in off-plan new-build schemes, or indeed for advisers to recommend self-cert mortgage products with no rental cover, without being fully satisfied that the customer has other sources of income.”
With total returns on buy-to-let remaining attractive at over 10% in June and demographic indicators suggesting that demand for rented accommodation will continue to grow, Paragon said it is not surprising that both intermediaries and lenders continue to see good levels of activity in the market place.
