UK buy to let is on the rise again!

Landlord Expert
By Landlord Expert June 8, 2010 15:59

The buy-to-let market is showing signs of life again as smaller lenders return to the fray, but a proposed hike in capital gains tax and cautious capital markets will add to the hurdles the sector faces.

The buy-to-let sector was emblematic of a British housing boom that saw property prices triple over a decade. It grew to represent 12 percent of new mortgages at its peak in 2007 as investors seeking higher returns poured money into real estate.

The sector slumped in the crunch to a fraction of its size, but is now reflecting a broader recovery in the housing sector, attracting returning investors, existing players and new arrivals seeking to dip their toes in the water -- all fuelled by a strong UK rental market and hints of a recovery in the appetite for mortgage-backed securities. "We think there is a strong market and demand has increased," Graham Beale, CEO of mutual Nationwide, which owns specialist lender The Mortgage Works, said last month.

It is still modest, however, and industry experts and executives say it is unlikely to return to previous form in the short term, not least because of the still-patchy nature of recovery in capital markets, holding back crucial funds.

It is also unlikely to prove as attractive an investment for dabbling amateurs as it was at the height of the boom. Nationwide itself says most demand has come from existing players remortgaging their properties.

"The increase in available funding will be limited to modest levels for the next few years, whilst the securitisation and wholesale markets recover," said Nigel Terrington, chief executive at Paragon, the third-largest lender in the sector at its peak, behind HBOS, now part of Lloyds and Bradford & Bingley, now in government hands.

But there are clear signs of life returning to the sector, a potential proxy for the wider residential property market.

In the latest, Paragon, which specialises in mortgages for landlords, said last month it would reopen its books this year as capital markets recovered.

At least two of a flurry of new entrants in the UK banking market -- Aldermore and Precise Mortgages -- have said in recent weeks they would go into buy-to-let.

The number of buy-to-let mortgage products tumbled from 3,662 at the peak of the market in August 2007 to a low of 179 in September 2009 -- but numbers have risen sharply to 304 in May 2010, according to data from


Adding to woes from capital markets, which have kept mortgage lenders away, the sector could suffer a setback with an expected increase in capital gains tax in the government's emergency budget expected later this month.

"Another rise in CGT will slowly edge UK property investors out of the property market as foreign investors take advantage of the favourable exchange rates," said Claire Hartnell, global head of property at Grant Thornton.

But most say damage will be limited.

"Capital gains tax is only symptomatic of a good property market, in which case people have made good money. I think we're still a nation who love buying property, so for a number of people where it's your chosen investment option I don't see that changing dramatically," said Luke Mills, director of London residential developments at Savills.

The UK's capital gains tax is expected to be increased to 40 percent from 18 percent with the Conservatives facing dissent within the party over plans to raise taxes on asset sale, a policy that is promoted by Liberal Democrats.

The buy-to-let sector is still a shadow of its former self, not least because of still-shaky capital markets that mean the market is currently expected to be worth 12 to 35 billion pounds in new lending by 2014 -- below the peak of 45 billion in 2007.

"All lenders are having much bigger issues on their plate than worrying about the little old buy-to-let market. For a lot of the big lenders, it's sub-scale. The only reason that Lloyds and Nationwide are there is because they already were," said Paragon's Terrington.

That means a dearth of mortgages for new investors.

This is frustrating for some investors given that the underlying rental trends in the UK are strong, with tenant demand for residential property continuing to rise in the three months to April, according to figures from the RICS, as a chronic lack of funding for first-time buyers keeps people renting.

New arrivals including Aldermore say they are attracted to solid fundamentals behind the rental market, supporting demand, and conditions that are keeping away investment banks and others that dabbled in the market at the height of the boom.

"What is happening with the banking sector means there is a lack of mortgage funding, particularly if you are a first time buyer, and those people go into the rented sector. For landlords who know what they are doing...the market is very good," said Colin Snowdon, head of residential mortgages at Aldermore and previously chief executive of Wave, a specialist lender backed by Merrill Lynch but shuttered at the height of the crunch.

"If you are a lender who understands the buy-to-let market, it is a good place to be. Margins are sensible, loan-to-values have returned to sensible levels and rental calculations are once again adequately demanding."


Landlord Expert
By Landlord Expert June 8, 2010 15:59


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