Soaring rents fuel return of buy-to-let

The boom years of the buy-to-let market came to an abrupt end with a credit crunch that many people felt private landlords helped fuel.

By the end of 2008, several of the biggest buy-to-let lenders had pulled out of the market while, as house prices fell, amateur landlords found themselves in negative equity.

But things have changed. Estate agent Savills recently estimated that private landlords account for almost a fifth of UK residential housing stock after a 40 per cent increase in their share of the market since 2007.

And lenders have returned to the market. There are now 486 buy-to-let mortgages available, according to Moneyfacts – 100 more than a year ago – while the average rate on those mortgages has fallen over the same period from 5 per cent to 4.79 per cent.

So why is buy-to-let apparently back in favour?

People with cash to invest have turned to property investment to secure a regular income that is no longer provided by high-street savings accounts.

The buy-to-let boom of the Noughties was characterised by investors looking to cash in on rising house prices, but the lure is now the regular income available to landlords.

David Alexander, owner of estate and letting agent DJ Alexander, said: “People with cash funds of £150,000 and upwards, and who previously would not have considered residential property, are turning to letting investments.

“These individuals are not by instinct ‘natural landlords’, but property rentals seem the best investment option in town for the time being when one looks at the alternatives.”

At current rates, private landlords can expect net yields of around 4 per cent a year, he claimed.

It’s not all good news for investors, however, especially those with an eye on making a tidy profit from the eventual sale.

The latest lending and home sales figures show little sign of the housing market recovering. Similarly, the chances of house prices returning to the levels of pre-2007 are, in much of Scotland, very slim.

“In that case property is not the sort of investment for someone who may need access to cash within the next three or four years and has no other financial source to fall back on,” Alexander noted.

Consequently, investors should be prepared for the long haul, said Matthew Gray, property director at Pagan Osborne.

“The nature of the property market has changed. It must now be viewed as a long-term investment rather than a quick turnaround, but investors are responding and succeeding in this changed marketplace.”

If you are going into buy-to-let for the first time you will need significant equity and good advice, according to John Boyle, head of research at Rettie & Co.

“It’s also an investment, so carries risk. The value of your property could go up or down. There are also risks in dealing with vacancies, interest rate rises and so on, plus hassle in maintaining the property and managing it – unless you get an agent, which will cost you, and you need to get the right one,” he said.

Robin Purdie, director of Mov8 Financial, offered similar advice: “Being a landlord is not always a bed of roses. Tenants are a lottery: you can end up with a superb tenant or an awful one. Maintenance will be required along the way, and things like statutory notices can potentially crop up. My advice is generally to use a trusted letting agent, provided the fees are competitive.”

But if you do play your cards right as a private landlord, it’s a good time to get into the market.

That’s because a moribund housing market low on first-time buyers and a shortage of affordable housing supply means there is now greater demand for rental accommodation. The result is rising rental prices and, vitally for landlords, fewer void periods when their property lies empty waiting for tenants. An extra boost for private landlords comes in the form of longer rental periods, with more tenants staying put for lengthy spells.

Online property portal City-lets recently reported that the number of lets in Scotland has increased by 17.5 per cent. Average rental income in Scotland has reached a high of £670, and half of properties were let within four weeks, with smaller flats being let quicker than larger properties.

There are significant regional variations, however. Rents in Edinburgh and Aberdeen are rising but average prices in Glasgow have fallen over the past three years, according to Citylets.

Boyle said: “If you look at some of the rural parts of Scotland in which we operate, such as the Borders and East Lothian, there is probably excess supply in a number of markets, driving rents down.”

And while lenders are returning to the market, it’s still far harder to secure a loan than it used to be.

Andrew Milne, a partner at surveyors DM Hall, said: “Most lenders are imposing some sort of lending restriction and there will also be strict criteria to meet, but where the investment is well thought out and well planned, opportunities certainly exist.”

But what of the tenants driving the demand? Rents are going up even in the absence of interest rate hikes, so some tenants are struggling to stay in their homes and those hoping to buy are finding it harder to save the required deposit.

Yet Alexander believes the advantages for landlords are not at the expense of tenants: “Today’s comparatively attractive rental yields are based on the level of return the landlord achieves from capital invested – the cost of a buy-to-let flat – rather than any great rise in rents.”

Rents are likely to keep rising, however, particularly in the prime areas of cities.

Boyle said: “I would also expect more property to move to rent while this is the case, but the lack of new housing supply will eventually put greater pressure on rent levels, even if the house sales market was to bounce back. I therefore think that rental growth will be maintained in the short to medium term.”