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ARLA Review & Index Q1 2008: increases in returns for buy to let investors

publication date: Jun 25, 2008
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Buy to Let investors have seen increases in their returns during the first quarter of 2008, according to the quarterly ARLA Review and Index.

The average return on a geared investment is 21.7%, up 0.27% and returns on cash purchases average 10.91%. Flats show a marginally higher return than houses, except in the North. All returns on rental investments include capital appreciation and rents. This quarter, the number of Buy to Let investors reporting a significant impact on the rental market due to immigration has increased by nearly 10% since the question was last asked at the end of 2006.

Unsurprisingly, given this increase in immigrant demand and the domestic demographic trends, nine out of ten investment landlords continue to state that they have no intention of selling their investment properties should house prices fall. This majority proportion is virtually unchanged on the last quarter.

About half, 46%, report their intention to buy further property during the next twelve months and the average life expectancy of their investments remains unchanged, at close on 17 years. However, irrespective of house prices, 18% of landlords will sell some or all of their property investments. Retirement has more than doubled as a reason, while others cited the purchase of other properties and realising gains. The quarterly ARLA Review and Index, the largest survey of its kind, is carried out with the support of the ARLA Group of Buy to Let Mortgage Lenders: Bank of Ireland Mortgages, Cheltenham & Gloucester, GMAC-RFC, Mortgage Express, NatWest and Paragon Mortgages.

The surveys providing the information for the Review and Index were carried out during February and March among 288 investors and 439 letting agents. Across their portfolios, landlords report an average Loan to Value ratio of 57%. The proportion with Loans to Value of more than 75% has dropped considerably over the last two quarters, falling from nearly 30% in the autumn of last year to 23.9% in March.

Commented ARLA Operations Manager Ian Potter, “There can be no doubt from these figures that Buy to Let landlords are well aware of the opportunities but behave with caution. In fact, caution has been the watchword in the Buy to Let market since its inception. Buy to Let remains the sustainable option for housing.”

The average portfolio contains just under seven properties, although half of all respondents only hold one or two properties. The most likely Buy to Let purchase is a property between 50 and 100 years old in good condition. The least likely purchase is of properties that have never been occupied or bought off plan.

Professional BUY TO LET investors: no sell-off

The Buy-to-Let market is increasingly populated by professional, experienced landlords investing for the long-term, research from Paragon Mortgages has shown.

A survey of 200 mortgage brokers revealed the number of first-time landlords applying for mortgages has been in decline since the beginning of 2002, while the percentage of remortgage and portfolio extension cases has steadily risen.

This suggests that the Buy-to-Let market is being driven by experienced landlords building long-term portfolios. ARLA research shows that the average Buy-to-let investor intends to hold the property for 17 years, while a separate survey from Paragon shows that 93% of landlords have held Buy-to-Let property for six years or more.

Nigel Terrington, Paragon Group chief executive, said: ‘There is still demand from new landlords to enter the market, but professional landlords hold the majority of stock and account for the bulk of the new transactions.

‘These landlords represent the core of the Buy-to-Let market – investors that base purchase decisions on proven tenant demand for long-term returns rather than speculative investment for a quick profit. We are experiencing one of the toughest environments for decades, but landlords are in a strong position and invest for the long-term, with some taking opportunist action to add to their portfolios.

‘We have seen reports that there will be a flood of properties being put up for sale, but we don’t believe this will be the case. You may see a trickle of properties being marketed by speculative investors wishing to make a quick exit, but our evidence suggests landlords are in it for the long-term. Research released by RICS last week confirms our view.

Their survey revealed that currently only 2% of landlords will sell at the end of their current tenancy due to changes in capital gains tax. Any inclination to cash in on property price gains at the lower tax rate is far outweighed by exceptional tenant demand leading to rising rents.’

Buy-to-Let specialist intermediary, David Whittaker of Mortgages for Business, confirmed that his business has been dealing predominantly with experienced landlords in recent months. ‘The last few months have been amongst our busiest ever as professional landlords respond to the highest rental demand they have seen for years and add properties to their portfolios at good prices. We can see that the owneroccupier, and in particular first-time buyer, is having a tough time of it but inevitably this has helped to bolster our clients’ businesses.’