The uncertainty within the mortgage market and ever-tightening criteria stopping prospective buyers from getting a mortgage has impacted favourably upon the buy-to-let sector.
Potential homebuyers are deferring purchase decisions and opting to rent, with total returns averaging 14.2 per cent - the highest level since June 2006. The current figure is up from 12.9 per cent in March 2007 and 10.5 per cent in September 2006.
This has pushed rents up by 6.9 per cent in one year alone, equating to £700, with yields holding steady at around 6 per cent over the same period.
In addition capital appreciation over the past year has boosted total returns – adding £13,640 to the value of the typical rented property.
Paragon chief executive Nigel Terrington predicts that tenant demand will continue to grow: “In the current environment, lenders are reducing their risk by handpicking the best customers and there are reports that the number of rejected applications has risen by 60 per cent in the past six months.
“However, the growth of the buy-to-let market has given these people more options – before it was either live at home or buy a property, even if it meant you were financially stretched, and we saw the consequences of that in the early nineties with mass possessions. Now, the private rented sector is offering good quality alternatives to house purchase, enabling people to live in a quality of home they may not necessarily be able to afford to buy."
He added: "Those people who would have been looking to purchase their first home in the current environment have the option of affordable and good quality rented accommodation instead.
“In an environment of stable yields, landlords expand their portfolios in response to identified tenant demand. More people choose to rent in an environment where they are unsure about the housing market, and on top of that demand from the migrant and student markets continues to grow.”
The consistently high returns landlords are generating can be attributed to their skills in identifying and purchasing property in areas where they know there is a ready rental market. Terrington explains: “Experienced landlords don’t buy on a whim and are not tempted by discounts or incentives from developers or property investment clubs. They only buy properties for which they know there is good tenant demand, which generally means affordable homes, with decent but not luxurious fixtures and fittings, in established communities. They generally steer clear of new build, for which there is little or no established market, and where there may be excessive competition from other investors.”
“Landlords generally finance their property purchases through a combination of mortgage finance and their own resources, and ensure that their financing costs are comfortably covered by rents received after taking account of other expenses and void periods.”
Indeed, Paragon research shows that landlords borrow, on average, less than 40 per cent of the value of their portfolio, and rent is typically 130 per cent of interest expense – so that the landlord makes a profit on a monthly basis.
