Despite continued negative sentiment on the buy-to-let sector, 2004 turned out to be a strong year for investor landlords, with high growth in the size of property portfolios, sustained growth in tenant demand and strong profits for buy-to-let mortgage lenders. Landlords expect another year of growth in 2005, with numbers of properties owned expected to increase by 5% over the next 12 months.

A year ago, Paragon Mortgages’ Landlord Buy-to-Let Trends survey showed the average landlord owning 11.3 rental properties. The average landlord’s portfolio has now risen to 12 properties with landlords currently forecasting that their portfolios will grow by 5% over the next year to 12.6 properties – an increase of 1 property on this time last year.

Professional landlords buy in response to identified tenant demand and recent signs of a more positive trend in landlord rental incomes as recorded by RICS and Paragon Mortgages seem to suggest an increase in demand for rental properties. According to Paragon figures, landlord rental incomes have risen over the past three consecutive months to reach an average of over £10,000 for the first time and 88% of landlords now believe that demand for residential property is either stable or growing.

John Heron, managing director of Paragon Mortgages, says: “Tenant demand is the driving factor in buy-to-let. The recent slowdown in the owner occupier housing market has had a positive impact for buy-to-let landlords. Demand for rented accommodation is rising as many potential buyers put off the decision to purchase in an uncertain market, and this is putting upward pressure on rents.

Rapidly rising house price inflation has placed particular strain on first time buyers. Paragon research found that although people typically leave the home at age 20, only 60% succeed in buying their own home by age 30. With an acute shortage of social housing the private rental sector is filling the accommodation gap, giving rise to sustained rental demand.

The long term demographic and social trends of the UK won’t change from this year to next. This all means that the private rental sector will continue to be buoyant. Although further interest rates are unlikely, owner-occupiers are likely to remain cautious as long as a further reduction in house prices appears possible.”
John Heron continues: “Lower house prices in the owner-occupier market, also give the market savvy professional landlord the opportunity to negotiate better deals on properties than in the over-inflated market of spring 2004. The slowdown in the housing market since last summer means that a number of speculators and small-scale investors may take steps to liquidate their portfolios.

However, for the serious investor buy-to-let is a long term investment and there has been no sign of significant selling activity among professional buy-to-let investors. The fact that, according to the ODPM, almost three-quarters of rented housing stock is owned by a mere 13% of landlords, suggests that the disappearance of the speculative investor should have little effect on the wider buy-to-let market.”

Many commentators incorrectly assume that buy-to-let is of its nature higher risk than lending to owner-occupiers. John Heron explains: “Some critics claim that buy-to-let is a riskier area of lending yet this clearly contradicts the facts. Lending criteria are typically more cautious than for owner-occupiers, with CML data showing a typical maximum LTV ratio of 80% for buy-to-let as opposed to 95% or 100% for the owner-occupier. With a buy-to-let loan, there are three potential sources of repayment – the tenant, the landlord and, in extremis, the property itself.

In addition, a landlord with a portfolio of properties won’t be unduly affected if one property is empty, while owner-occupiers who encounter payment difficulties have very limited options. In fact arrears in the buy-to-let sector continue to run at low levels, in fact at around half the level of the mortgage market overall.”
“In summary, 2004 was an excellent year for landlords, who have made a total return of 29.5% on an average property bought 12 months ago – much more than almost any other form of investment has yielded. As informed professionals serious buy-to-let investors will remain cautious but with a strong understanding of the dynamics of the private rental business they will continue to build their portfolios and to benefit from attractive returns over the long term.”