The UK housing market continues to benefit from capital growth, but as buy-to-let represents just 6% of the total sector’s borrowing, the influence of tightening yields on pricing mechanisms can only ever be limited. However because of its size, buy-to-let is at risk from the sentiment and levels of activity of house owners and lenders in the mainstream market.
There is already evidence that base rate rises have taken the momentum out of house prices. With the impact of the most recent increases yet to filter through to monthly payments, there is a feeling that the “patient is responding to the medicine” and that more at this stage might result in “an overdose”.
The base rate increases since November 2003 have suppressed higher level loan to property value buy-to-let borrowings and have acted as a natural break on further property acquisition, requiring now greater capital injections on purchases. This is supported by the slowdown in rate of activity of landlords who remain active but in a more considered and focused manner.
The irony is that if house prices were to fall back significantly, declining confidence would in the short term increase demand for rented property bolstering landlords’ cashflow. However, the ability of landlords to realise capital from leveraging assets would also be reduced, not only by capital constraints but also by rent to mortgage interest cover calculations.
The manner in which landlords manage their properties is likely to become ever more businesslike as rents continue to outstrip inflation (but not at the expense of occupancy levels). The old bug bear of collecting cash rents is fast disappearing with increased use of standing orders and the mind focus of a month’s rent on deposit. Fergus Wilson, a professional landlord, with some 600 properties in Kent reports “we have no rent arrears across the whole portfolio. Screening tenants at the outset is the key. Only twice in the last year have we had to dip into the rent deposit, but the tenants have always brought the account back up-to-date.”
The portfolio diversification strategy (as highlighted in the recent Mortgages for Business survey of commercial property investment) of landlords who started out in the buy-to-let sector should be viewed as beneficial as spreading property types will enhance the quality of their overall business cashflow. These landlords have developed considerable skills and knowledge within the residential sector and are now moving into sectors which show some similarity – such as mixed commercial and residential developments. Where a longer history of the property types within the portfolio exists a trend towards pure commercial can be identified which improves the overall balance even further.
The ultimate measure of landlord sentiment would be wholesale disposal of properties. Some profit taking is evident but Mortgages for Business’ clients still appear to be net purchasers of buy-to-let properties.
