With the benefit of hindsight we can now see that the conditions that prevailed in the mid 2000s were both exceptional and unsustainable. Too much that was labelled ‘buy-to-let’ was in practice speculative property investment and the market did not do enough to maintain sensible controls, with the result that some lenders and some investors got well and truly burned.
We have seen confidence slowly returning to the buy-to-let market. The Council of Mortgage Lenders reported that buy-to-let accounted for 11.5 per cent of gross mortgage lending in 2012, compared to 9.8 per cent in 2011. The market is continuing to perform with £4.2m of new lending to landlords in the first quarter of this year.
This is good news for landlords operating in the buy-to-let market. The private rented sector is more important than ever with the continued squeeze on housing and the difficulties that first-time buyers encounter struggling to save for large deposits.
Dynamics
The dynamics of the buy-to-let market are also slowly changing. Traditionally, growth has been driven by professional landlords with larger property portfolios. However, these landlords are increasingly finding it difficult to release equity and source new, competitive lending. The private investor landlord – those with between one and five properties – is emerging as a key player in the market.
With confidence and optimism increasing in the buy-to-let market, we have in fact seen a steady increase in the number of first-time landlords buying rental property.
In Q1 of 2013, 22 per cent of intermediaries’ business came from new landlords compared to approximately 20 per cent for the last 12 to 18 months.
The level of business from first-time landlords started to fall towards the end of 2007. As confidence slowly started to return to the buy-to-let market the levels of business from first-time landlords started to climb again, and since late 2009 this level has remained fairly consistent, peaking at 24 per cent in Q3 of 2012.
Investing in buy-to-let property is a long-term commitment. When we hear stories of things going horribly wrong for new landlords it tends to be because they have not done their homework properly before making an investment. Far too often a novice investor will buy first and ask questions later – we recommend reversing this process.
Running a successful rental portfolio is something that requires time, energy and money and is not a ‘quick-win’ investment. Being a landlord is a big responsibility and before prospective property investors even start looking into property they wish to purchase they would be wise to look into the wealth of support available to landlords through trade bodies such as the National Landlords Association.
Getting it right at the beginning by investing in the right type of property and in the right area is key, but first-time landlords also need to make sure they understand their commitment to prospective tenants. They need to make sure they understand the regulations that will govern them, for instance ensuring they understand the health and safety requirements of a rental property.
Landlords also need to make sure they have a clear idea of the level of rental return they expect to achieve from the property and ask themselves whether it will cover their mortgage and other costs.
This is also where the investor/intermediary relationship is important, particularly for new landlords. They can get support and help in selecting the best and most competitive product.
It is not just about products, though, as intermediaries will also help prospective landlords gauge what their gearing will be. The intermediary relationship has long been an important one and it is even more so for the buy-to-let market where purchases are often more complex than with residential cases.
Demand for rental property is at a peak and landlords are expecting demand to remain strong. In a recent survey of landlords, 43 per cent said that they expect demand to grow or boom in the next 12 months.
As people are now more mobile, settling down is less of a priority until later in life and the flexibility of renting suits this lifestyle. The difficulty faced by first-time buyers of securing a deposit to enable them to get onto the property ladder has been well documented and, in turn, this has put further pressure on an already strained private rental sector.
The increase in net migration in recent years has also driven up demand in the private rental as immigrants are more likely to live in rented accommodation than purchase property. Predictions are that net migration to the UK will be around 190,000 a year and many of these people will live in the private rental sector, usually in metropolitan areas – further driving up the demand for quality rented housing.
More investment in the sector is therefore greatly needed and, with the barriers to institutional investors still a concerning factor, it will fall to individual landlords to grow the sector, providing much-needed homes for a greater variety of people.
Professional landlords may continue to find it difficult to release equity so it is likely to be the smaller and new first-time landlords that will be making investments in the sector and helping to drive growth.
Outlook
The outlook for first-time landlords is good. Confidence in this area of the market has certainly started to return and prospective investors can see the wider growth in the buy-to-let market. Property is still a popular choice for investment and, with a degree of uncertainty still surrounding other asset classes, I think we will continue to see growth in first-time landlords entering the market.
As long as buy-to-let investment decisions are made carefully, with research behind those decisions, it will most likely be a very sound investment for the future. I would expect to see a continued rise in the number of first-time landlords, as long as the market remains as healthy and competitive as it is now.
John Heron is director of mortgages of Paragon
Key points
The BTL market is continuing to perform with £4.2m of new lending to landlords in Q1 2013.
The dynamics of the buy-to-let market are also slowly changing
Settling down is less of a priority until later in life and the flexibility of renting suits this lifestyle
