If the UK introduces property investment funds (PIFs), they would add value to the property market by making it more flexible and diversified, according to the first of two new reports commissioned by the Council of Mortgage Lenders. However, PIFs would be unlikely to have much effect on buy-to-let, as they are likely to operate in different segments of the market.

The authors of the report point out that US REITs (real estate investment trusts), on which the proposed PIF model is based, are primarily concerned with commercial property, and that REITs make up less than 1% of the US private rental sector. They suggest that, in the UK, PIFs might account for 2-4% at most of the private rented sector. But they see PIFs as potentially serving particular niche areas such as affluent professionals, key workers/students, urban regeneration and new build, and affordable housing.

From the point of view of investors, the authors again see PIFs as appealing to a different group of people than buy-to-let landlords. They are more suitable for passive investors looking for professionally-managed, large, diversified portfolio investment opportunities. The authors expect that perhaps half the larger listed UK property firms and a quarter of smaller firms might convert to PIFs provided the transfer fee was not prohibitive, and that there could be about £10-£20 billion of PIF activity in the first 3-5 years.

The other report published today by the CML is an analysis of the profile and intentions of buy-to-let investors, based on a survey of 1,340 landlords. The survey found that about a quarter of these had only one rental property, while about the same proportion owned three to five properties. Less than 2% owned more than 50 properties, and the median number owned was four.

Around two-thirds of buy-to-let landlords had another job or relied mainly on other income, but 20% derived a significant amount of their income from their buy-to-let portfolio and for 11% it was their main job or source of income. "Professional" landlords (defined here as those who receive rental income equal to at least the national average income, and who can live off their income without selling properties to release capital gains) accounted for around a fifth of the total. They have portfolios worth at least £1 million typically made up of 6-20 properties.

At least half of landlords had mortgages on all their properties. Most had mortgages representing 26-75% of their mortgaged portfolio. Less than one per cent had a loan-to-value ratio of over 90%. The vast majority of landlords have interest-only rather than repayment mortgages.

Looking ahead, fewer than 6% of landlords said they planned to reduce their portfolio or leave the market over the next six months, while 38% said they planned to increase their portfolios. Over 60% said they expect to stay in the residential rental market for more than ten years. The main things that would encourage landlords to buy were low interest rates, rising house prices and very good rental yields. The main things that would make them sell were rising interest rates and rental income that did not cover the mortgage - these were more likely than stagnant house prices to prompt landlords to sell.

Commenting on the two new reports, CML Senior Policy Adviser Andrew Heywood said: "Taken together, these two reports outline a stable future for the buy-to-let sector, and the possibility of modest improvements to some segments of the rental market if PIFs are introduced."

"Buy-to-let is maturing, with landlords becoming more experienced and professional, and is making an important contribution to the private rented sector as a whole."

Property Investment Funds for the UK: potential impact on the private rental market, by Michael Ball of the University of Reading and John Glascock of the University of Cambridge, is available at http://www.cml.org.uk/servlet/dycon/zt-cml/cml/live/en/cml/pdf_pub_resreps_54.pdf

The profile and intentions of buy-to-let investors, by Kathleen Scanlon with Christine Whitehead of the London School of Economics, is available at http://www.cml.org.uk/servlet/dycon/zt-cml/cml/live/en/cml/pdf_pub_resreps_55report.pdf 

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