Designs on Property Rental Market Update

publication date: Jan 6, 2012
 | 
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books
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Designs on Property Rental Market Update


2011 has proved a good year for the rental market. Firstly, lenders have started to realise buy to let investors are typically a ‘safe bet' when it comes to lending money, with the average landlord having an estimated loan to value ratio across their portfolio of 46%, according to ARLA's third quarter 2011 lettings report.

Secondly, tenant demand is on the increase, meaning lower voids and rents have started to recover and in some cases overtake the heights achieved in September 2008. Much of the media's headlines about rent rises have however given an inaccurate picture as they compare year on year rents which ignore the fact that rents fell between 5% and 20% throughout 2009 due to excess rental stock from accidental landlords.

Past Rental Market Performance


The two main industry measures for past market performance are Paragon Mortgages and Association of Residential Letting Agents (ARLA).

For the rental market from a landlord's perspective, key measures include capital growth of the property they own (asset) coupled with rental income, which in an ideal world would be higher than any costs incurred. Both of these indices measure these returns.

YieldQ1 2004Q1 2011        Q2 2011        Q3 2011       
ARLA5.1%5.2%5%5.1%
Paragon7.2%6.2%6.2%6.1%
xxx
Annualised Capital Growth    
ARLA (over 5 year period)8.55%5.21%5.66%5.66%
Paragon11.60%N/AN/AN/A
xxx
Combined ReturnsQ1 2004Q3 2011
ARLA11% to 23%9% to 22%
Paragon19.45%N/A

Typically with buy to let (BTL) investment, the longer you hold the property for, the better the returns you will receive. This will always be true as long as prices rise consistently and rents can be increased to cover any buy to let costs. Unfortunately, the credit crunch which hit in 2007, has meant those who have invested since that time haven't necessarily done as well, both from a capital growth perspective as well as a rental perspective.

Much of the media has concentrated in 2011 on headlines such as the BBC's title ‘private rents still rising' and the Guardian in September claiming August rents rose by a ‘record amount'. Unfortunately what the media didn't cover back in 2008 was the rent falls which ranged up and down the country from 5-20%, so the real headlines for 2011 should have been ‘rents recovering from lows of 2008'!

Overall, from a landlord's perspective, depending on when they invested, the market is looking pretty perfect.

Landlords who invested pre 2005
Rents are either stable or rising with only a few areas showing slight falls in 2011. Although property prices have fallen (bar Central London) since this time, overall those investors who bought pre 2005 would have seen big enough increases in property prices to ride out the recent falls.

The only exception to this is amateur investors; especially those who invested through property companies who it's apparent sold stock at far higher prices than were sustainable, especially in the City Centres. Surprisingly though, many of these haven't gone under, but are either pumping money into their investment in the hope it will recover long term or the banks have taken the renting and running of the property over to avoid a forced sale and losses all round.

For those that have primarily invested for income (yield), the capital growth or lack of it will have little bearing as long as LTVs are 75% or less, good rents and tenants staying longer in properties all help reduce the overall costs of running a buy to let property.

Landlords who invested post 2005
Unless a great deal was secured on the property, or the buy to let (BTL) was to generate income rather than capital growth, those reliant on rising property values are probably having a tough time. The key to how bad things are for landlords in this situation will depend on how highly leveraged (or geared) they are. Those with properties bought post 2005 with loan to value (LTV) ratios of 80% or less, may struggle to re-mortgage and others who are on very low mortgage rates may find it difficult to fund their BTL when interest rates return to a more normal 5% and mortgage rates could be as high as 7%.

In summary, according to Paragon Mortgages:-

"Buy to let is a UK success story - strong growth allied with excellent credit performance. The sector is helping to meet genuine consumer demand, improving both choice and standards for tenants, whilst providing an alternative asset class for investors wanting diversification."

Source:
Paragon Mortgages: The UK private rented sector and buy to let market 2011


ALSO READ - Current Rental Market Performance and Rental Market Outlook for 2012

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