The buy to let market is thriving, but too risky for most newcomers
Ten years ago, twins Matthew and Peter Jones were both plain-clothes policemen who dabbled in buy-to-let. Today, they are professional investors with a portfolio of 25 homes worth £10m and enough confidence in the property market to launch their own firm of estate agents and buying agents last year. You will find their offices in Richmond, west London, where house prices have more than tripled over the past decade.
“We ended up making more money through property than by doing the day job so we became full-time professionals, setting up M&P Properties in 2003,” says Peter Jones, 35. The twins bought their first buy-to-let property, a two-bedroom flat in Twickenham, for £82,000 in September 1997. It is still part of their portfolio and is now worth £295,000.
Peter and his brother agree that the property market has been slowing down. They have seen the downbeat economic forecasts including the predictions by Capital Economics, the analyst group, that the housing market is poised for two years of falling prices. But they see the softening market as an opportunity rather than a threat. “This year looks like it will be a time to snap up a good deal,” says Peter. “There will be sellers out there who are prepared to sell at reasonable rates. Next year we will be looking back on 2008 as a good buying opportunity. We hope to have added at least £2m to our portfolio by 2009.”
The Joneses put three offers in just before Christmas, when the market was at its most quiet, and are in the process of buying a three-bedroom house for £800,000 in Richmond, a one-bedroom flat for £300,000 on Richmond Hill and a small one-bedroom house in Twickenham for £250,000.
Matthew and Peter are not the only buy-to-let investors out shopping. Haydee Softley, 36, who sold her entire portfolio of 10 properties in south London between February 2006 and November 2007, is out hunting for country property to redevelop.
For eight years Softley had been a full-time investor, focusing on ex-council flats. But rising service charges and increasing red tape took the shine off her returns. Softley sold her properties for between £160,000 and £230,000 and having paid the taxman a hefty sum, she used the profit to buy a five-bedroom Victorian farmhouse in Hampshire.
She shares her home with husband Mike and their children Aidan, two, and one-year-old Amber and now has a new base to look for a different kind of investment. “This year I’m looking for a big place to do up in the country,” she says. “Nobody is buying at the moment and everybody is terrified of the market, so it’s a really great time. Every year people say: ‘You’ve missed the boat.’ I was told that when I started out in 2000. But with interest rates coming down and prices flattening out, it’s a great time to strike a good deal.”
Other professional investors agree. The latest survey from the Association of Residential Letting Agents (Arla) suggests that landlords have shrugged off recent falls in the value of rented property with almost half planning further purchases this year. Although the average value of a rented property fell by 1.3% between October and December
2007, nine out of 10 landlords intend to stay in the market for the next 17 years. Council of Mortgage Lenders (CML) figures published in February appear to confirm investors’ confidence. The CML reported that the total number of buy-to-let mortgages passed the million mark following a 23% rise in the number of outstanding of loans.
The sector remains resilient despite concerns that the buy-to-let market would grind to a halt because of the credit crunch and weakening prices. Speculation that landlords will be selling in droves come April when capital-gains tax is lowered to a flat rate of 18%, also seems misplaced. The novice investors of the 1990s have become today’s big players and will not be easily shaken by predictions by Capital Economics that prices will fall by 5% this year and 8% in 2009 and that yields will increase but buy-to-let mortgages will dry up.
This month’s Royal Institution of Chartered Surveyors Lettings survey reports a drop from 6.5% to 4.6% of landlords selling properties when leases expired. It also notes that gross yields increased at their fastest pace since the third quarter of 2005.
There are about 500,000 buy-to-let investors in Britain and Arla estimates they own property worth well over £120 billion. Moreover, 82% of private rented property is in the hands of professional or semi-professional landlords who own 10 homes or more, according to figures from Hometrack, the property data company. These landlords are doing very nicely. Rents are rising and demand for rented property is growing. Data from the Royal Institution of Chartered Surveyors (Rics) shows rental growth was particularly strong in London, the southeast, the east, the Midlands and Wales. It was more subdued in the north and Scotland.
Arla says that the demand for rental homes is set to grow by 20,000-30,000 a year over the next decade because of the rise in the number of divorces, immigration and increasing job mobility. Add to that the number of potential first-time buyers priced out of the market, and there are an awful lot of people needing rented accommodation.
Landlords, estate agents and property analysts alike believe there are still opportunities for investing in property, provided investors do not expect to become millionaires overnight. Focusing on tenants and rental growth rather than capital appreciation is the key in this market.
Arla’s continuous warning that investors should steer clear of “off-plan” properties that have not yet been built is even more resonant now.
Ian Potter, head of operations at Arla, says: “This kind of property investment cannot make for a realistic buy-to-let proposition. The rental market is too fluid to make judgments on rental values and potential demand months or even years in advance, for property that has yet to be built. We cannot repeat this warning often enough.”
Potter says potential investors must take advice from local professionals about the property, the way it is furnished and the realistic market rent.
Rather than being seduced by new-builds, Richard Donnell, director of research at Hometrack, the property data company, advises investors to seek out places where the proportion of young people priced out of the market is high but the availability of rented housing is low.
Donnell says: “Rather than hope for much appreciation in value, the main focus should be getting a decent rent and a steady supply of tenants. Anybody getting into the market now has to accept the prospect of growth at just 1%-2% above inflation.”
Top of his shopping list is Harlow in Essex, where the average price of a two-bedroom home is £157,680. Here landlords can charge rents of £195 a week, which give a gross yield of 6.4%. Better still, it is great for commuters with direct trains taking them into London Liverpool Street in just over half an hour. Other places in Essex to consider are Basildon, Thurrock and Broxbourne, which offer yields at about 5%, with rents on two-bedroom properties ranging from £150 a week to £183.
The most expensive properties on the Hometrack list are in Adur, West Sussex, where a two-bedroom home costs about £200,611. But because of its location between Worth and Brighton, landlords can reap rents of about £213 a week, producing a yield of 5.5%. Investors should also consider Crawley, also in West Sussex, as well as Eastleigh in Hampshire, Oadby
and Wigston in Leicestershire, Stevenage in Hertfordshire and Tamworth in Staffordshire. However, not all potential landlords should rush off to the estate agents. Buy-to-let is no longer a game for amateurs. The credit crunch in the financial markets means that investors are required to put down larger deposits and pay higher rates, placing buy-to-let beyond the reach of all but seasoned investors who have built up lots of equity over the years.
Donnell says: “Until 2003 buy-to-let was a no brainer. But the sums no longer add up for new investors. With property prices where they are now you need a deposit of between £30,000 and £60,000 to make an investment work. People who aren’t already in the market are going to have to step back.”
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