And let's face it .... skyrocketing property prices and rising tenant demand mixed with a modicum of common sense have made it quite difficult not to show a return. Over the last year or so, however, fast changing market conditions have started to make BTL a little more challenging as an investment opportunity. In this special review, therefore, we will look at the current state of the UK BTL market, try to predict where the market might go in 2007 and look at how and where BTL can still be a viable proposition for the shrewd investor.
State of the Market
The BTL market is, of course, tied to the fortunes of the property market as a whole. So, firstly, let us refresh OUR memories on the state of that market: After several years of positive movement many commentators predicted anything between a crash and a soft landing for residential property prices last year. But 2006 proved to be another impressive year. Figures from the Nationwide Building Society indicate that house prices rose by 10.5% on average in 2006. (Although parts of prime central London, Northern Ireland and Scotland recorded price rises of three times that level).
The average UK house is now worth around £175,000 and is rising in value at approximately £45 a day. As a result of this most commentators are optimistic about the property market for 2007, (although increasingly conscious that affordability is being stretched to the limit in many places). Yolanda Barnes, director of research at Savills, sees prices rising 7% this year, while Liarn Bailey, head of residential research at Knight Frank, is looking at 6%. Fionnuala Earley group economist at Nationwide Building Society predicts house prices will rise by 5-8% over 2007. Hometrack suggests rises will be around 4-7%, while pointing out there will be marked regional variations and projecting up to 9% for Northern Ireland.
So how does that translate to the BTL market, if at all? Recent published market surveys are quite mixed: BTL specialist Paragon Mortgages, suggest that BTL continues to be an attractive investment. Its latest BTL Index says that over the past 12 months the average BTL property has risen in value by 5% or £7,736. This compares with 0.8% or just £1,277 over the previous 12 months. Nigel Terrington, chief executive, comments: "In terms of capital appreciation alone, the average buy to let investor has made over £7,700 this year just by owning a rental property. On top of that, he has generated almost £10,000 in rental income, an excellent total return on investment of £17,700 or 11.4% over the past 12 months. 2006 has definitely been a good year for most buy to let investors."
The latest RICS Lettings Survey (August-October 2006) is rather more guarded. Based on 'in the field' reports from surveyors it says instructions to let property rose at the slowest pace since Q2 2005 with just 6% of surveyors reporting a rise in instructions to let property compared to 13% the previous quarter. It says that the slowdown 'points to a deterioration in landlords' margin triggered by recent interest rate rises and a renewed fall in gross yields.' It records that the slowdown was skewed primarily towards flats as BTL investors expressed caution in the market.
Update - 20 Jan 2009
In the current market we have seen a number of changes which have affected the property market in general and in particular investors' attitude to the buy to let market. As we have indicated above a number of clients entered the buy to let market for the first time because of rising property values and have now had to deal with a massive downturn in the price of residential property. What must be appreciated is that despite falling prices, providing that the rental income still services the outstanding mortgage, investors should net be panicked into selling the property at what is completely the wrong time. History shows that vast number of clients who arranged buy to let mortgages did soon Bank of England base rate tracker schemes and with base rate currently at 1.5% the mortgage repayments would have fallen quite dramatically in recent times.
Although we can understand how investors may feel when their property may now be in negative equity provided that the rental income services the mortgage repayment by a margin this is still a sound long term investment. The market is actually a goldmine for investors who have the cash to put down as a deposit on properties which are now at bargain prices. It is predicted that prices may still fall by a further 10% this year and if this is the case this should factored into any price negotiation when looking at further property purchase.
A number of investors are taking advantage of the position where if they are buying below 'true' market value there is an opportunity to purchase the property using a bridging loan which would allow you to arrange a loan based on the bricks and mortar valuation rather than the actual purchase price. If you are able to find a property that can be purchased considerably below market value you may be able to purchase and get 100% funding if you get your sums right! We would then arrange for a remortgage with a buy to let lender to take out the bridging facility after a given period of time.
So, despite all the doom and gloom that the credit crunch has brought to the UK, for the experienced investor and entrepreneur, buy to let properties are still very much alive and the bargains are there if you are prepared to look long and hard enough.
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