Buy to Let Continues to Grow
According to a new report in the Financial Times, the buy to let sector in the UK is continuing to grow, despite interest rates rises meaning that typical rents no longer cover mortgage costs.The article suggests that recent volatile movements in the stock market may encourage even more people into the apparent security of the property market. But lenders, struggling to raise finance for risky mortgages, are likely to make borrowing more difficult for buy-to-let investors in the near future.
The buy to let sector accounted for 12 per cent of new loans in the first half of 2007, recent figures show. Landlords took out 171,800 buy-to-let loans in the period, raising the total number of such mortgages to 940,000, according to the Council of Mortgage Lenders.
Overall, the sector has grown from comprising 3 per cent of mortgage lending in 2002 to 10 per cent today, after a loosening of lending standards by many banks. Some now offer buy-to-let mortgages without requiring minimum rental cover or income proof, despite rental returns hitting record lows.
Over the past year, rental yields have fallen while borrowing costs are typically 30% higher. This means a typical landlord may buy a property on a 5 per cent gross yield, but receive only a 3.5 per cent net yield after costs such as maintenance and voids – well below a typical mortgage rate.
Anthony Lock, non-executive director of the National Landlords’ Association, said he had been “tidying up” his own portfolio, cutting it from 15 to 10 London properties. “When I started 15 years ago you could get a yield of 12 or 13 per cent – now it’s about 4 per cent,” he said. “A lot of professional landlords are neither going to increase their portfolios nor decrease them.”
Many buy-to-let investors are therefore reliant on capital growth to make a profit.
Pierre Williams, of Instant Access Properties, an advisory group, said investors were still confident of capital growth. But he added: “The era of automatically making money, regardless of the type and location of property bought, is over.”
Andreas Panayiotou, of the Ability Group, a private company that has developed 2,500 flats in London, said the maths on buy-to-let no longer made sense. Many investors were “not really clued up to what’s going on”.
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