Buy to Let may not be all it seems
According to the Association of Residential Letting Agents (ARLA) over a million households live in buy to let properties. They say these property assets are worth over £120 billion and the sector contributes over £30 billion to the economy each year, which is more than that made by all the pubs, hotels and restaurants in the country and is over four times more than the contribution from the motor industry. Whew. The sector sounds like nothing but good news.
But the world of buy to let can be one of smoke and mirrors – and opinion imbued with vested interest. And for some, who struggled to get the expected returns, it was an investment that turned into a nightmare. But still, 10 years since the introduction of buy to let mortgages to the UK market, investors’ appetite for them shows no sign of slowing down. Watchers of ‘property porn’ such as Channel 4’s Location, Location, Location, continue to be tempted by promises of high yields, cheap credit and relaxed lending rules. But a closer look at the market reveals what many buy-to-let investors do not want to admit. Yields are rarely as high as imagined from that ‘steal’ bought in an ‘up and coming area’.
The real rates of return
ARLA say, assuming a rather optimistic capital appreciation rate of 8.8% a year, an investor can expect an annual return of 23.5% over five years on a buy to let investment, a sector that now makes up a whopping 14% of the mortgage market. If prices do not rise as hoped (that rather crucial 8.8%), you’ll be stuck with a depreciating asset. Isn’t that a liability?
ARLA also says that, on a 75% mortgage of £217,597, the net income after voids and interest is £486 a year. That means that after putting up £78,335 as a 25% deposit, you will receive less than if you had put the money into a savings account. It gets worse. The ‘voids’ include only acquisition costs and rent lost over 27 days a year. They don’t include buildings insurance, fees paid to letting agents, the cost of furniture and appliances, new home information packs, new licensing legislation, or any of the costs that come from unforeseen problems such as rowdy tenants, breakages and renewals. Effectively, there is nothing left without the hope of property price increases.
More doom and gloom
According to data compiled by Investment Property Databank, which monitors property prices, the net yield on rental property is around 3.6% across the country (and this excludes mortgage repayments), and can be as low as a paltry 2.8% in London. Evidently, rents have not risen in line with property prices in recent years, which means that new buy to let investors with only a small amount of equity in their properties are funding gaps on mortgage repayments by pinning their hopes on capital appreciation of the house.
As we have noted, the buy to let market is huge, so if the property market falters, it could have dramatic consequences for the many people with their money tied up and also for the families who live in the houses. This is before the worry of interest rates is taken into account. A 1% rise would add £83 a month to every £100,000 borrowed. Insiders believe it would take only another 0.25% rise to slow the market significantly.
Feeding the buy to let beast
Many argue that the influence of buy to let investors is such that they have effectively fed the house-price beast since 1996. A succinct example was reported in The Mail on Sunday in July 2006 on property developments in London. At Falcon Wharf development in Docklands, 70% of purchasers were investors; at Angelis in Islington, 69% were; and at Lanherne Gate in Wimbledon, investors made up 46% of buyers. The success of those developments is effectively in the hands of those investors.
In the summer of 2006 Location, Location, Location’s presenters Kirstie Allsopp and Phil Spencer (both property agents, it is important to note), described Oxford as the “ultimate buy-to-let in the ultimate place to invest”. Whereas according to one local agent quoted in The Guardian, “returns that were 11% a few years ago are now closer to 4%”. New investors in the buy to let marketplace would do well to weigh up the pros and cons by speaking to people involved in all reaches of the market – not just property agents who may have a vested interest in ‘bigging up’ the market.
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