One of the most traditional forms of property investment, buy-to-let properties have historically been the investment option of choice for savvy landlords seeking a regular return on their investment.
The 1988 Housing Act was the birth of the buy-to-let boom, de-regulating the private rental market and allowing landlords the power to exercise more control over their property. By the mid-90s, specialist buy-to-let mortgages were readily available through the high-street banks, opening up the market to an influx of first-time investors who took the opportunity to purchase a property purely as an investment vehicle, rather than a family home.
As buying patterns changed, so too did the trend for living in the suburbs instead of central urban areas. Traditionally, apart from London, UK city centres did not have many habitants, but the conversion of vast amounts of warehouse land in the regeneration projects of the 1990s provided ample space for leisure, commercial and residential centres, attracting a host of young professionals into the cities, as they competed for trendy living spaces without the annoyance of a long commute.
Fuelled by the introduction of cheaper and more easily available mortgages, plus a rising demand for city centre living, the property market exploded and tenant demand in major cities like Manchester, Liverpool and Birmingham grew at a phenomenal rate, leading to a wave of new construction projects across the UK.
Attracted by the hands-off style investment opportunity that the conversion and building of new properties presented, the new generation of landlords found that the concept of buy-to-let became even simpler and, with lower maintenance costs and fully-managed buildings, the buy-to-let proposition became an increasingly attractive one.
A nation of private renters
Fast forward to the present day and the collapse of the property market in 2008 irrevocably changed Britain from a nation of home-owners to a nation of private renters, in the process moving the UK to the bottom of a market cycle, which has presented a new range of opportunities for buy-to-let investors.
Demand for rental accommodation is the highest it has ever been, with an estimated 1.2 million more households renting from private landlords at the start of 2011 than there were in 2006, compared to a decrease of 130,000 in owner-occupiers over the same period.
The rise in house prices over the past 3-4 years, coupled with a lack of construction in all areas of the country, has resulted in a lack of affordable housing, preventing first-time buyers from taking their first step onto the property ladder.
According to Jones Lang LaSalle, the number of first-time buyers in England has fallen to below 200,000 per annum, a staggering drop when you consider there were 600,000 in 1999. This massive fall in numbers can be attributed to many factors, including the lack of lending by banks, meaning that the average deposit now hovers around the 25% mark, in order to access a reasonable mortgage rate – something which is completely unattainable in today’s economic climate for the majority of potential home owners.
A market under pressure
The issue of a deposit in the early boom years would have been resolved quite easily through a loan from the ‘Bank of Mum and Dad’, but as the shape of the housing market changed, so too did the division of housing wealth across the generations, creating an uneven split between who holds the bulk of the equity in the market.
According to research by Savills, two thirds of the UK’s housing wealth is now held by the older generations (categorised as 55+) and we are faced with a high percentage of our property market tied up by owner occupiers who are mortgage-free, with no desire to release the equity in their property until much later in life, either through inheritance or by downsizing – a timespan that is much longer than is required by the younger generation of buyers.
Given the constraints that the housing market is currently under, it is little wonder that the government has come under increasing pressure to produce a solution to the nation’s housing problem.
Whilst there is an on-going debate about the sustainability of the Help-to-Buy scheme, it has been welcomed by some sections of the property community for giving an injection of liquidity to the market, enabling a number of first-time buyers to take that first step on the property ladder, as the deposit they need to put together is considerably smaller than on the open market.
In addition to trying to stimulate the housing market with policy reforms, like the ones imposed in 2011 in regards to Stamp Duty for large-scale landlords, the government has also accepted the findings of the Montague Report, and is actively looking to implement the recommendations made, which will remove the barriers for institutional investment into the Private Rented Sector.
So committed is the government to finding a solution to the problem, that it has already announced plans to unlock £200m of funding, in addition to £10bn of guarantees for those institutions which plan to invest, as a way to stimulate house building and create a long-term, ‘built-to-let’ sector, which will work alongside its home ownership schemes.
The UK has experienced a severe lack of construction in regards to residential stock in its regional towns and cities over the last five to six years, which means that many properties which will previously have been classed as ‘new build’, are now reaching their 10-year anniversary. As properties age, they require more maintenance to keep them at a level regarded as the minimum standard required by tenants, leading to a larger outlay by landlords in the long-term on repairs and maintenance etc.
Construction has started again in regional cities like Manchester, Leeds and Liverpool, and investors are increasingly turning towards off-plan developments and refurbishment projects, as a means of building up their portfolio without having to outlay a large part of their capital on the upkeep of the building. In addition, the realisation that the new-build developments come complete with management and lettings agents already in place, in most cases there are even on-site management suites, makes the new wave of buy-to-let investments extremely attractive in the present climate.
The new buy-to-let landscape
The re-introduction of easily accessible mortgages, alongside the stabilisation of house prices, has led to a renewed interest by property investors into the buy-to-let market. Currently sitting at the bottom of a market cycle, yields for rental properties, particularly in large urban cities like Manchester and Leeds, have been rising for the past couple of years, with landlords reporting average yields across the country of 6.3% in 2012, according to research by specialist lender Paragon Mortgages.
In addition to portfolio investors, many now see property as an alternative to a pension, viewing it as a tangible asset that will always be in demand. The UK property market is extremely sophisticated in terms of legal structure and ownership, allowing for a long track record of transactions and values, supporting growth over the long-to-medium term.
The potential to earn a high return on a property is greater now than in the height of the boom, when landlords were purchasing property based on the capital appreciation of the asset and achieving rental yields of less than 4%. With property values having fallen dramatically in the period since 2008, some by up to 40%, yields have now more than doubled, presenting landlords with a generous income with which to re-invest in their portfolio.
When held alongside the knowledge that the property generates a rental income which, in most cases more than covers the cost of the mortgage, then it is no surprise that private investors are eager to once again turn to a more familiar form of investment.
Article Author – Samantha Jones – Head of Marketing – Knight Knox International