Property investors return to the market

Property investors have been returning to the buy-to-let market in larger numbers since the spring, with many landlords refinancing to fund the expansion of their portfolios.

Analysts say investors are being attracted by strong rental demand, which has seen average UK rental income rise for seven consecutive months – to reach a new high of £713 per month in August.

According to the latest LSL Buy-to-Let Index, average rents across England and Wales have increased by 4 per cent over the past year, while annual growth in London currently stands at 6.6 per cent.

Figures from the Council of Mortgage Lenders show that more investors have been seeking to profit from this trend in the past few months, by applying for buy-to-let loans. From April to June, 32,000 buy-to-let mortgages, worth £3.5bn, were taken out – an increase of 21 per cent on quarter one and the highest number, and value, of landlord mortgages granted since the last quarter of 2008. Remortgages accounted for 65 per cent of this overall increase.

John Heron of Paragon, the buy-to-let lender, says capital raising was the main reason for landlords remortgaging during the second quarter.

“Approximately two-thirds of properties in the private rented sector have no mortgage, while the average loan-to-value on those properties with a mortgage is 48 per cent – so there is a huge amount of equity in the sector that landlords are looking to utilise to help fund portfolio growth,” explains Heron.

Mortgage brokers have also reported an increase of enquiries from professional landlords. TBMC, a broker that specialises in buy-to-let, saw a 9.4 per cent rise in applications during the second quarter.

Nigel Bedford of Largemortgageloans.com says his firm has had more enquiries from investors looking to buy new investment properties, rather than from so-called “accidental landlords” – residential homeowners forced to let out their properties as they are unable to sell them.

“These ‘accidental landlords’ have been at a pretty consistent level, but true investors had been rather quiet until recently,” he notes. “Now that there are some higher loan-to-value deals available, the professionals are seeing the value in refinancing existing property portfolios to extract equity to use as deposits on new properties.”

Most landlords are currently buying in London, but Birmingham, Portsmouth and Manchester also popular.

Bedford believes there has been a shift from consolidation of buy-to-let portfolios back to a “modest expansion”. A survey of the clients of Assetz, the property investment advisers, reveals a similar picture. It found that more than three-quarters of its investors are considering buying additional investment properties over the coming year, and they cited strong rental demand as one of the main reasons for expanding their portfolios.

Half of those surveyed said long-term capital gain is now their top priority, closely followed by rental income.

Stuart Law of Assetz says landlords are being encouraged by the high rental returns currently available. “UK residential property in the right locations is increasingly viewed as a safe haven, offering investors a long-term, low-risk investment for their cash.”

Property investors are also returning to the new-build market. According to Hamptons International, there has been an increase in large-scale investment purchases, of properties comprising 10 to 150 units, as well as more amateur investors buying in new-build developments.

Nick Vaughan, head of residential development and investment at Hamptons, says a lot of these new-build developments are now more sensibly priced and providing decent yields for investors.

He gives the example of a development on Commercial Road in east London where a two-bedroom flat costs from £332,450, providing a rental yield of between 4.8 per cent to 5.9 per cent. Similarly, a two-bedroom apartment in The Lismore development in Clapham costs from £499,950, and gives a yield of between 4.5 per cent and 5.5 per cent.

At present, the best buy-to-let mortgage deals are currently offered by Skipton Building Society, a lender that returned to the market in March. It has a two-year tracker mortgage at 3.24 per cent – base rate plus 2.74 percentage points – with a £1,240 fee, which is available for up to 60 per cent of a property’s value.

“The key is not to be seduced by the very lowest interest rate but to look for the best overall value over a given period,” advises Bedford. He points out that The Mortgage Works, part of Nationwide Building Society, has a 2.49 per cent tracker that looks superficially attractive – but lasts for only a year and comes with a 3.5 per cent fee.