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Healthy Returns for Existing Buy to Let Landlords

According to the latest surveys existing buy to let landlords are enjoying an increase in rental yields as a result of the downturn in the UK housing market. The severe constriction of mortgage availability for (first-time buyers desperately trying to get on the property ladder), coupled with severe supply restrictions (as new build construction dries up), means more and more of the population are forced to rent. As a result the real winners are existing landlords who have weathered the credit crunch and held on to their properties during a volatile few years in the buy to let and wider property market.

A recent report by property website Rightmove shows that rental yields are now over 6% a year. This means existing buy to let investments are one of the few stable investments that are managing to stay ahead of inflation. In addition 50% of all tenants survey felt trapped (unable to afford to get onto the property ladder or find suitable accommodation elsewhere). These pressure have meant landlords have been able to increase their rents this year by over 10% in some areas of the country. The average monthly rental now stands at over a staggering £700 a month in the private sector. Letting agents have also been reporting higher rents being achieved upon both tenancy renewals and for new tenant lets. The proportion of those expecting rents to be lower in 12 months time now stands at just 7%.

Tenants stuck in rental accommodation who cannot afford to buy are now paying substantially more than the average homeowners mortgage each month. A recent analysis by zoopla.co.uk found that it is now cheaper to buy a property than rent in 80% of towns and cities due to falling house prices and rising rents. Monthly rent on a two bedroom flat is now typically 9.9% higher than interest-only mortgage payments on a comparable property, based on an interest rate of 5%.

The confidence in the buy to let sector seems to be returning and was underlined this week by the announcement from the U.K.’s largest mortgage provider Paragon who said they have made a pre-tax profit of £71.8m in it’s last financial year, up from £54.3m in 2009. The structural supply problem is putting more and more pressure on tenants. Tenants are struggling to access high quality rental properties due to high degrees of competition from other potential tenants. Tellingly tenants arrears dropped substantially in October according to LSL Property Services. David Newnes, Estate Agency Managing Director of LSL Property Services said: “Constrained mortgage finance is choking off the number of first-timers able to get on the ladder, and would-be landlords’ ability to buy investment properties. With rising demand outpacing the increase in supply, rents can only go one way.”

To make matters worse for urban tenants the coalition Government also announced recently that they will remove council house life tenancies and extend the right to buy council property. Critics claim this will restrict supply for low paid workers seeking rental accommodation in the future. Miles Shipside, a director of Rightmove said: More than 40 per cent of people in rented accommodation in our survey reported their fears of another upwards movement in rents. They are at the sharp end of competitive demand from other renters, experiencing a struggle to find suitable rental accommodation and losing out on properties to higher bidders.” There has been a staggering reduction of 25% in the number of properties advertised in rent on the Right Move website (which provides reasonably good barometer of market demand and supply). Despite recent major lenders and economists prompting concern that property prices remain stagnant and highly prone to future falls, recent property prices in central London and other hotspots have remained buoyant. In particular overseas investors for high-end £1m+ properties have kept averages high cross London.

However the picture across rural areas remains worryingly stretched. Despite landlords enjoying high yields Halifax commented recently that the average house price equals 5.4 times average annual earnings in urban areas and equals 6.4 years earnings in rural areas. Prospective landlords need to be aware of the potential downside in the capital values of their investments. Conversely for those landlords who are quite happy to hang on to their properties for income generation, the short to medium term seems reasonably positive. The main medium term risk for current landlords is any sharp increases in interest rates used to combat inflation. Many amateur landlords would find themselves in negative equity in situations where they may be forced to sell.

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