recent times has seen the rise of the non-professional landlord

Landlord Expert
By Landlord Expert October 29, 2010 09:46

The flooding of the buy-to-let market by non-professional landlords in recent times has led to the sector experiencing a mini-boom, which presents lenders and advisers with a series of challenges.

After emerging from the worst recession and housing downturn in living memory, property investors have had reason to cheer this year in. Despite the wider housing market having to navigate through troubled waters, buy-to-let has seen a resurgence in the past year, which should feed through into a growing number of investors blazing a trail to their broker to help secure suitable loans.

The mini-boom has been largely down to the sharp increase in rental income since last year. 'Reluctant landlords' created a glut in the supply of rental properties in 2008, with properties put onto the rental market as they were not easy to sell.

However, as the sales market improved the majority of accidental landlords were able to exit the rental market. To compound this drop in supply, tenant demand has risen. In a recent survey of landlords 37 per cent stated that they had seen demand for their properties increase, while the Association of Residential Letting Agents says that tenant demand is at an eight-year high.

As a result of the changing supply and demand dynamic, rents began to stabilise in early summer and autumn last year. Since then, they have steadily headed upwards. According to the latest data from LSL Property Services's monthly buy-to-let index, landlords have enjoyed consecutive rent increases for the last eight months. The average rent now stands at £689 a month across the UK, with investors in London realising a monthly rental income of £971 on the average property. This is a far cry from the level we saw 12 months ago – with UK rents now 6 per cent higher than at their lowest ebb in February last year.

As rents have flourished, compared to the stuttering summer house price growth, new landlords have been looking at increasingly attractive yields on their investments. The average yield on a rental property is now at a respectable 4.9 per cent.

Unsurprisingly, we have witnessed an increase in new landlords looking to take advantage of the resurgent market. The good news for prospective investors and buy-to-let brokers is that mortgage finance conditions are showing indications of easing. In this year's second quarter there were 13 per cent more mortgages advanced than in the previous quarter. Although the 24,900 loans advanced in the second quarter were less than a third of the levels we saw three years ago, it is a significant step in the right direction.

In recent months, there was more encouraging news for brokers and investors from the entrance and re-entrance of several buy-to-let lenders. Following the launch of Precise Mortgages earlier in the year, Aldermore returned to the buy-to-let market and Paragon started lending again last month, targeting professional landlords with a range of buy-to-let deals with a maximum LTV of 75 per cent. It is a clear sign that sentiment in the buy-to-let market is improving enough for many of the notable absentee providers to return to the fold - to match the appetite of investors for funding.

Existing buy-to-let lenders have started responding to growing demand as well. With the increased competition among buy-to-let providers more affordable and achievable products are trickling onto the market. For instance, The Mortgage Works has recently launched some products with an 80 per cent LTV. Recent research by the broker, Mortgages For Business shows that the number of buy-to-let mortgages available has risen by 396 per cent in the past year – albeit from a low base. Although we are still considerably down on historic numbers, brokers are seeing more products becoming available which can only help them find the deal that meets their client’s needs.

One thing is clear, new lending looks to be much more cautious than before the housing market downturn, and quite rightly so. In the last buy-to-let boom, amateur property speculators and property clubs looking to make a fast buck were able to access mortgage finance easily. When house prices no longer continued to rise, many speculators were left in negative equity with properties that did not have a sufficient rent to cover the mortgage. In cases such as these, lenders can use experienced asset and property managers to improve the income from such portfolios, either through rental or sales, or a combination of both.

As a consequence of lessons learned from the housing market slump, providers such as Paragon are targeting professional landlords with a proven track record of buy-to-let success with new products. This is not a bad thing. A sustained recovery in the housing market, and the private rental sector in this case is dependent on sensible, responsible lending. Lenders are gearing towards supporting professional, committed and experienced landlords to minimise their future risk. Potential property investors, and their advisers, need to be aware of lenders' changing criteria, and demonstrate that their investment strategy is based on underlying fundamentals like yield and tenant demand.

The one cloud on the horizon at present for the buy-to-let market is the recent uptick in tenant arrears. Tenant finances stayed in good shape through the recession, as the mix of renters changed.

Frustrated first-time buyers, in ruder financial health, remained within the private rental sector for longer. But in the last two months, the amount of rent owed has risen as public sector job losses and increasing rents have taken their toll on tenant finances. In September one tenth of all UK rent was in arrears, and with the full impact of government spending cuts to be felt in the labour market, it is not likely that arrears will fall away soon.

Tenant arrears are a landlord's worst nightmare. It is rental income that pays the mortgage each month. With inflation high, it will not be long before the monetary policy committee moves to increase interest rates, pushing up the amount many landlords will have to pay in interest each month. In this environment, it is even more vital that landlords and their property managers to become especially diligent in collecting unpaid rent. In this year's second quarter, just 1.72 per cent of buy-to-let mortgages were three months in arrears. As unemployment increases, we should see this figure rise over the medium term alongside repossessions. In such a changeable economic climate, it is crucial that brokers and introducers are providing sensible advice to investors to ensure they are not over committing financially, but are choosing suitable mortgage products that will protect against future rate rises.

With so many buyers unable to afford the high house prices, or gain the funding to buy their first home, the private rental sector has had to grow. As the average first-time buyer age continues to rise and a lack of affordable housing is built, the private rental sector will expand even further to continue to plug the housing shortfall. This means that tenant demand and rents will stay strong in the long-term. It is true that lenders must walk a fine line between sensible lending, and repeating the mistakes of the past. But with the fundamentals in place for sound long-term investment, lenders must continue to open their purse-strings to provide professional landlords with the means to capitalise on the situation. Nevertheless it is also the duty of financial advisers and mortgage intermediaries to ensure that clients' buy-to-let borrowings are commercially sensible, which is in the interests of all parties, investor, lender and intermediary.

David Brown is the commercial director for LSL Property Services

Landlord Expert
By Landlord Expert October 29, 2010 09:46

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