UK landlords continue to grow their portfolios of buy-to-let properties, with a rise in the average number of properties held from 11.3 last quarter to 11.9 this quarter (up 5%), according to Paragon Mortgages’ latest buy-to-let trends survey. Portfolios are a third larger than they were at the end of 2002, up from 9.0 properties.

Over the same period, landlords have generally become more cautious in terms of the gearing of their portfolios, with average loan-to-value falling from 44% in November 2002 to 41% this quarter. The graph shows the generally downward trend in landlords’ gearing over the past two years.

John Heron, managing director of Paragon Mortgages, comments: “Our findings show that buy-to-let landlords as a breed are prudent individuals, and overall have reduced the gearing across their portfolios.”

“While property prices have risen strongly in many parts of the country over the past couple of years, landlords’ borrowings have not grown at the same pace. This must be seen as a positive factor and a further indication that buy-to-let lending is very safe, with landlords clearly taking a responsible and cautious approach.”

This is borne out by Council of Mortgage Lenders figures showing that arrears on buy-to-let loans are much lower than on mortgages in general – 0.51% are 3 months or more overdue, as compared with 0.81% for mortgages overall. Concerns over the quality of buy-to-let lending are clearly misplaced.”

The average void period experienced by landlords per year has been fairly stable since the beginning of last year. There was a slight rise relative to last quarter (from 2.7 to 2.9 weeks) but the current level of voids is broadly in line with the long-term trend. This does not suggest there is any significant deterioration in tenant demand for rented property.

On average, landlords report that 3.4 viewings are needed to secure a letting, up from 3.2 viewings last quarter, but the same as two quarters ago and less than in Spring 2003 (3.6 viewings).

As for future prospects for buy-to-let, landlords have since last quarter become somewhat more optimistic as to the likely growth of their investment portfolios. Over the next 12 months, they now expect to see a 10.1% increase in their portfolios to an average of 13.1 properties. Last quarter, they expected growth of 8.6%.

While landlords continue to increase the number of properties in their portfolios, the average value of portfolios has declined slightly, from £769,200 to £757,700. This suggests that investors may be changing the mix of properties they own, tending to favour cheaper properties.

John Heron explains: “Landlords will generally purchase properties for which tenant demand in the local area is strongest and where the best yields can be achieved: lower value properties tend to generate higher yields than more expensive ones.”

“On top of this, investors are ‘unemotional’ purchasers of houses and as such are frequently able to negotiate good deals. The slight reduction of portfolio value combined with a rise in the number of properties held provides evidence of landlords buying lower price properties in order to obtain a higher yield.”

Over the coming 12 months, landlords expect to see their overall net investment in residential property (taking into account changes in value and additions/disposals) to grow by 6.6% or just over £50,000 to £807,708.

John Heron concludes: “There continues to be clear evidence that the fundamentals of buy-to-let remain sound, and there is absolutely no reason to believe that it is a ‘bubble’ about to burst or indeed that there is a ‘bubble’ at all. Most residential property investors are cautious financially, as we see from their prudent approach to how much they gear their investment portfolios.”

“Tenant demand remains solid, with average void periods up only very slightly and the time it takes to let well in line with the long-term trend. The low level of first time buyers together with demographic trends that underpin demand from renters mean that over the medium term demand for private rental accommodation is certain to be sustained.”

“From the lender’s perspective, buy-to-let loans are safer than the average mortgage to an owner-occupier, with a significantly lower level of arrears. The lender will typically offer a lower loan-to-value on a buy-to-let mortgage and will benefit from three different sources of covenant – the tenant, the landlord and the property itself.”

“Landlords are more confident about the future than they were at the end of last year, expecting their portfolios to grow by 10.1% by number and 6.6% by value over the coming year.”