Buy-to-let deals on upswing

The buy-to-let market may be turning bleak for some landlords as rents and house prices fall but professional investors, armed with enough capital to buy multiple properties, are finding some enticing opportunities.

Property agents are selling blocks of new-build flats to private investors at discounts of up to 40 or 45 per cent of the peak market price. Some developments are now providing gross rental yields of up to 10 per cent.

Agents said experienced property investors who had large amounts of equity were keen to re-enter the market, particularly as returns from other assets have been so poor.

“Yields have begun to look very favourable,” said James Mannix, head of residential investment at Knight Frank. “For the first time in years it is possible to buy investment property and take an income out of the rent. And investors are buying cheap so they are going to get significant capital upside once growth returns.”

He noted that in central London yields were between 5 and 8 per cent, while in more peripheral areas they were as much as 10.5 per cent on sensibly priced properties.

The greatest discounts on capital values are coming from new developments that are coming up to completion. Agents have reported that many of the deals agreed two years ago were collapsing as investors failed to obtain the necessary finance.

Many buyers are sacrificing deposits, typically of 10 per cent, and are walking away from deals, leaving housebuilders and developers increasingly desperate to shift stock. So, if a new investor can buy an entire block of flats, or at least a portfolio of multiple properties, developers are willing to sell at almost half the peak market price.

“Some developers have been very keen to sell existing stock and have been giving further discounts on the market falls just to recall cash into their business,” said Tim Wright, partner at King Sturge, the agent.

He added that developers were interested in offloading portfolios of properties so private investors looking to buy just one or two flats are struggling to obtain the same deals.

Some agents said the real “fire sale” deals which offered the biggest discounts are drying up as stock levels fall. But there are still opportunities for professional investors to pick up repossessed properties in areas such as Canary Wharf in London and flats in schemes where initial deals have fallen through.

Wright forecast that the best remaining deals will only be around for the next three to six months. “Bulk deals agreed 18 months ago are coming under huge stress now,” he said.

Buyers are typically long-term UK investors who had low gearing or no gearing at all during the boom years and European buyers who are drawn by the cheap pound. They often have 50 per cent or more in cash and in order to secure the discount must be able to complete quickly, often in a matter of days. They are often buying between 50
and 150 one-bedroom and two-bedroom flats at once.

Many investors are looking for properties that are already let. Rents have dropped sharply in the past six months, but mainly in the higher end of the market. Agents said one-bedroom and two-bedroom flats have held their value better but advise investors to assume rents will come off slightly more over the next year.

Private investors who do not have the capital to buy property directly could look at one of an emerging number of funds. Property Bourse, the investment company, is planning to launch a London recovery fund that will be open to private investors. The fund will look for high-yielding areas where prices are likely to rebound first. One potential investment in south-west London is a portfolio of properties priced at £1.3m, with an expected rental income of £126,000.