Buy-to-let investing – the pros and cons in an uncertain market

11th April 2013

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A rise in prolonged arrears has cast doubt on the wisdom of using buy to let property as an alternative source of investment income writes Jill Insley.

The number buy to let loans reached an all time high in 2012 as record rents encouraged landlords to take on more properties, according to the Council of Mortgage Lenders. The total number of buy to let mortgages rose to 1.4m, or 13% of all mortgages in 2012, up from 12% in 2009 and 9.6% in 2006.

It’s no wonder: the rental sector has enjoyed strong demand since the start of the banking crisis as those who would normally be looking to buy their first home have been both priced out of the market and unable to borrow a mortgage.

Census figures show that the number of households renting privately increased from 2.6million in 2001 to 4.2 million in 2011 in England and Wales. Estate agency Savills estimates that by 2016, one in every five households in England will be renting in the private sector.

But the uncertain economy and changes to welfare benefits are taking their toll. Severe arrears – tenants who are more than two months behind on their rent – have risen by 4.8% in the first quarter of 2013 compared to the previous quarter, according to the Tenant Arrears Tracker published by LSL Property Services. It found that the number of tenants more than two months behind on payments rose by 4,000 to 94,000, leaving the quarterly figure the fourth highest on record.

The level of severe arrears over the past 12 months is now 20% higher than the long term average.

Paul Jardine, director and receiver at Templeton LPA, a firm that specialises in handling buy to let receiverships for lenders, believes that tenants’ finances are under strain as increases in wages lag far behind spiralling household costs, particularly energy bills.

“As 2013 progresses, the ability of tenants to pay their rent will depend on improvements in the labour market and wages in particular. And the number of people out of work has actually risen a little recently, with the percentage defiant at 7.8%,” he said.

“As the UK flirts with a triple dip recession, a vigorous rebound in average wages looks far from likely.”

David Lawrenson, a private landlord and author of Successful Property Letting, is also concerned about the impact of changes to welfare benefits on landlords who let property to claimants. The government has reduced housing benefit, basing the amount claimants can receive on the lowest third of local rents instead of the previously used median.

Even more worrying for landlords, it intends to roll it into the new Universal credit, which is being trialled at the end of April in the north-west of England and is due to go live in the rest of the country later on in 2013. This means the money will go straight to the tenant as part of their once-a-month payment, rather than to the landlord, introducing a risk of non-
payment.

“Like many others in housing, I am deeply concerned about the harshness of (and impact of) the government’s welfare changes, especially the impact of the myriad changes to Local Housing Allowance and the coming Universal Credit,” said Lawrenson.

“As a result of this and other changes, I have no doubt that we will see even more private landlords exiting this end of the market, leaving those at the bottom of the housing pile with very few (or no) housing options.”

However Jacqui Daly of Savills Research believes that the mismatch between demand for rental accommodation and supply will ensure that rents continue rising in the mainstream market, with an average increase of 18.2% by 2017.

But those who are considering rental property as an investment should think carefully about where to buy. Daly points out that a weaker economy and fears of public sector cuts in the North and Midlands are likely to restrict rent rises. Likewise rental growth will be limited in areas dominated by tenants on housing benefits.

In the past year, rents have risen by just 2.4% according to the Countrywide quarterly lettings index and this rise hides falls in the South East of 1.1% and Scotland of 2.6%.

The biggest rises were in Wales and the East of England, where rents grew by 5.5% year on year, and in outer London which saw rent increases of 5.4%. In central London, where rents and property prices are the highest in the UK, the increase was 1.9%.

Nick Dunning, group commercial director at Countrywide, said: “The growing average monthly rents across the UK shows the increasing attractiveness of regions outside London. London remains a good place to buy property, but investors are venturing further afield for investment opportunities.

“Scotland is an anomaly to this. With falling rents and increased arrears being compounded by recent legislative changes, investors might be deterred from buy-to-let investment.”

 

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