The BTL market is due for a major slowdown over the next 5 years, claims Savills…

Prospects of reduced returns over the next five years are likely to lead to a period of consolidation and a slowdown in the growth of the buy to let sector, according to Savills latest buy to let survey, but not a significant withdrawal from the sector.

The survey of just under 400 buy to let investors owning 2,782 properties with an approximate portfolio value of in excess of £600 million, identified four key reasons for this conclusion:

The vast majority of owners view their investment as long term, with 55% of owners looking to retain their portfolio for at least 10 years and 71% relying on their investment to provide part of their pension.

There is a dominance of large investors with an equity cushion – 70% of landlords owning more than 20 properties have more than 25% equity in their property holding. The majority of owners are able to meet existing borrowing costs out of rental income. Only 10% of owners would currently consider an outright sale even in the event of further pressure on returns.

Change of emphasis

Jacqui Daly, Savills research comments, “We expect this slowdown in the expansion of the sector to be accompanied by a change in the profile of properties acquired by buy to let investors. There will be a shift away from new build flats were returns are likely to be under the greatest pressure. Whilst 55% of owners own new build flats within their portfolio, only 24% of respondents would look to expand their portfolio by acquiring this property type.”

In contrast to headlines of the demise of buy to let, the survey found that two-thirds of all buy to let investors are looking to increase the size of their portfolio. Where owners hold more than 20 properties the proportion looking to expand increases to 84%.

Daly again, “There is an increasing tendency for investors to look to expand their portfolio through overseas investment which is representative of a wider trend towards cross border and the growth of the so called “fly to let” market.”

Future investment ‘more discerning’

Moving forward, the survey suggests that, whilst recent pressure on returns and the ability to make geared investments “wash their face” in cash terms will lead to a slowing in the expansion of the domestic buy to let sector, the likelihood of an exodus is limited particularly with the prospect of further interest rate cuts and some rental growth.

However, future investment is more likely to be more discerning, with 42% of owners of large portfolios looking to acquire a mix of housing types to spread their investment risk. However only a very few buy to let investors are considering investment into niche markets such as student housing in the form of houses for multiple occupation.