Well over half (55%) describe tenant demand as ‘stable’, while over a quarter (26%) are experiencing growth in tenant demand. A small but significant minority of 3% describing tenant demand as ‘booming’.
Paragon Mortgages’ managing director John Heron explains: “Tenant demand, the key driver of buy-to-let, remains remarkably sound. The vast majority of landlords – more than 80% - are finding that tenant demand is stable or on the up, with a significant minority of over 3% going so far as to say that demand is ‘booming’. Tenant demand is key to investors’ decisions as to whether to purchase new properties: they approach buy-to-let as a serious, long term business and so long as they identify good levels of demand they will generally continue to grow their portfolios. The survey confirms this confidence in the future, borne out by their plans to continue to build their property holdings: on average, landlords expect to grow their portfolios over the next 12 months by 6% in terms of property numbers, and by 5% in terms of value.”
The average landlord in the survey currently owns 11.3 residential properties, worth £789,000, and expects to grow this to 12 properties, worth £829,000 over the next 12 months. This quarter, the value of the average portfolio is up 4.1% from the figure of £758,000 last quarter.
John Heron continues: “Landlords are cautious and careful investors, buying at the best price they can and only when they perceive that there is good demand for properties of that type in that location. They are also cautious over how much they borrow relative to the value of their profolios. Indeed, two thirds of landlords have borrowings amounting to less than half the value of their portfolios, while only a tiny 4% have borrowings of more than 75% of the value – and none has more than 90%. This means that landlords have plenty of equity, giving a comfortable ‘cushion’ should there be any decline in house prices in the future. In fact, we’ve seen a steady reduction in average gearing on landlords’ portfolios, which has now dipped below 40% (to 39%) for the first time – helped, of course, by the strong appreciation in property values.”
Landlords report that gross rental returns on their property portfolios are 7.3% (correlating closely with the figures from the May Buy-to-Let index – of 7.27%). Having generally declined over the past two years, there is a modest increase in the yield being achieved this quarter, from 7.1% to 7.3%. However, as prudent business people, landlords remain cautious regarding the future and are working on the assumption that yields will ease a little more, to 7.0%.
John Heron says: “There may be signs that yields are firming a little, but landlords remain a cautious breed, so they are doing their sums on the basis that yields could decline a little more. On the other hand, they do see good levels of tenant demand at present and in the future, yields still compare favourably with other forms of investment and, as a consequence, investors continue to buy with confidence.”
This quarter, there was little change in the average void period which remains remarkably low in absolute terms at less than 3 weeks in a year
Most landlords operate in a very independent fashion, and the survey shows that only a relatively small proportion (21%) are members of a trade association. Those who do join such a body are twice as likely to join the National Landlords Association (NLA) as any other. John Heron believes that membership of such organisations can be very helpful and cost-effective for landlords. He explains: “As a fairly disparate and independent-minded professional group, landlords don’t co-operate a great deal between each other. Trade organisations can help them speak in a more unified way, representing their interests in the industry and to government at all levels. By joining and swelling the membership of trade bodies such as the NLA, landlords will give themselves a more powerful voice, and also benefit from various other valuable benefits which can more than justify the annual subscription. At Paragon Mortgages, we are now offering all our customers a limited form of membership of the NLA and hope that they will be encouraged to participate fully in the association.”
