Property: the big buy-to-let opportunity?

The buy-to-let property sector is bracing for a groundswell of demand as mortgage lending dries up for would-be homeowners – pushing more and more of them into the rental market.

Figures compiled by the Council of Mortgage Lenders (CML) show that the number of properties being bought with buy-to-let mortgages increased by around 84,000 in 2011.

While these statistics do not approach the heights of the buy-to-let fever in the third quarter of 2007, when quarterly lending totalled over 93,000 loans worth £12.7 billion, the market is recovering from its low point in 2009.

The trend looks more marked when seen alongside a 24% increase in new tenants in 2011, according to estate agent Countrywide; as well as a forecast by real estate firm Savills that the number of people renting their homes will rise from today’s levels of 3.4 million to around 4.3 million by 2016.

This would represent one in five UK households, the lowest levels of home ownership since 1961.

‘The market is being driven by two fundamentals; there’s not enough housing to meet the rate that households are formed in the UK, and mortgage lending has significantly reduced since 2007,’ said Bernard Clarke, a spokesman for CML.

Rented accommodation has never taken off in the UK like it has on the European mainland; in France around 37% of the population pay some form of rent, according to figures collected by the European Statistic Authority, Eurostat.

‘There has been a stigma attached to renting in this country, surveys show that most people still aspire to own their own home. But with many not able to move out of the rented sector as traditionally happened, for 20 and 30-somethings it has become more acceptable to rent,’ said Neil Chegwidden, director of residential research Jones Lang LaSalle.

The biggest fund management houses have been looking at residential property for a long time, according to David Wise, property investment director at Kames Capital, but how to unlock its full value has been the main difficulty.

‘Over the medium to long term, residential property has a lot of attractive qualities. The UK is a small island so immediately there is a scarcity issue. Households are growing and there are planning restrictions that make building new homes more difficult,’ said Wise.

Data compiled by the International Property Databank (IPD) released in April 2010, showed that investment grade residential real estate in the UK had outperformed commercial property over three, five and nine years.

Changes to the legal framework regulating real estate investment trusts (Reits), coming into effect this July with the 2012 Finance Bill, will open the residential property market up to more investors.

‘One thing that is happening is that Reits will become more tax efficient as result of these changes. For example, owners with several properties now only pay stamp duty on the average price of the portfolio. This has levelled the playing field between institutional and private investors when investing in residential property,’ said Chegwidden.

However, very different drivers of return on investment affect the residential market when compared to commercial property. Some experts understandably are wary of making the investment case for residential.

‘Even though the rental market is quite strong, yields can be as low as 3% in central London for residential property. In the commercial property world the market is
driven by investors, but prices in the residential space are set by the owner-occupier market,’ said Chegwidden.

‘Residential doesn’t stack up as an income play as the yields are too low relative to commercial property. Capital growth has driven total returns in the past, but the state the market is in means there’s not going to be a lot of activity in the capital side of the equation for some time,’ said Wise.