2008 rental demand “extraordinary”

Demand for rental property dipped slightly in October, with the number of leases commencing, down 2.35% on September, according to lettings agent Your Move.

The Your Move Rental Demand Index uses two-month rolling averages to measure demand for lettings in the UK and since the index cut-off date, Your Move has tracked a recovery in demand. The most recent weeks’ figures reveal the number of renters beginning new leases is up 6% from September 2008.

Managing director of Your Move, David Newnes, said: “The minor slowdown in demand for let accommodation in September was sparked by the global interest rate cut and resulting confidence boost – our sales side saw a small lift. But rental demand overall this year has been extraordinary – this is the busiest we’ve ever been in lettings.”

Demand for rented accommodation is growing strongly year on year, with the number of new leases beginning 53% higher than in October 2007.

Newnes added: “People don’t stop needing a roof over their heads because there’s a credit crunch. But the screws are tight in the mortgage market. We’re convinced the boom in demand for rented homes is a direct result of the lack of mortgage finance available. Despite the 1.5% cut in the base rate, you have to remember there are only 2,000 mortgage products on the market today compared with 16,000 this time last year and it’s all the best deals that have been pulled. People who would normally buy, are renewing their leases and staying put in rented accommodation until the market stabilises.”

Assetz sees window of opportunity for investors

Assetz believes that a brief window of opportunity is opening up for investors and homebuyers as lower interest rates take effect, coinciding with increasing pressure by banks on developers to sell existing stock and increase cash reserves.

The firm notes that there are now several buy-to-let mortgages available on the market at around 5.5%. With rates set on a downward trend and the cost of LIBOR continuing to fall, Assetz believes the cost of financing property purchases is set to dip even further in the run up to Christmas.

At the same time, banks are putting more pressure than ever on struggling developers to reduce housing stock, cut borrowing and boost cash flow as the recession takes hold. Consequently, professional bulk buyers are now securing discounts of 30 – 40% plus, off Royal Institute of Chartered Surveyors valuations. These valuations are themselves temporarily depressed on new build property whilst there is a stock overhang. These are likely to be the lowest prices for new build housing ever to be seen again in the UK.

Stuart Law, chief executive of Assetz, said: “The perfect moment has arrived for investors to re-enter the market, as developers rush to sell off stock at rock bottom prices, combined with a new lower cost of borrowing. This period will only last three to six months, before stock runs out, but it could work to kick-start the entire property market as competition among buyers returns.”

Landlords urged to insure against defaults

Landlords may resist covering themselves against the risk of defaulting tenants, even as possessions rise, because of a fear of high premiums, according to Let Insurance Services.

It warns that this ‘strategy’ could prove to be a false economy now that the risk to the lettings market has increased driven by rising unemployment and, in some areas, falling rents. These lower rents are occurring where ‘reluctant’ landlords are causing a glut by letting properties they cannot move on the sales market.

Government statistics may show that rent possession cases reaching the courts are considerably lower than the peak reached in 2002. These statistics include both the private rented sector and social landlords. However, Let Insurance Services, which supplies tenant referencing, rent and legal protection insurances to letting agents, says they have fallen only because of the pre-action protocol for social housing.

It believes the reality is different. Rent possession claims have risen by nearly 10% from a year ago and are likely to increase further.

Demand is growing significantly for specialist insurance to cover the loss of rental income and the legal expenses to pursue defaulting tenants, according to Michael Portman, managing director of Let Insurance Services.

He said:“However, remember that premiums may vary and landlords and their letting agents must be very cautious with cheap insurance quotes. You will get what you pay for and if you do not pay enough, the cover could fall badly short.

“Read the small print very carefully.”

Full insurance against potential loss is likely to average between 1.5% and 3% of monthly rental income. However, risk management begins with referencing as it is difficult to get full cover without demonstrating that proper tenant references were obtained.

Portman said: “Even in today’s climate, when change in a tenant’s circumstances can happen overnight, proper checks still help to reduce risk to a tenancy and to keep premiums down.

“The specialist insurance and credit referencing market is now a sophisticated niche market where the problems and opportunities are properly understood. This market has grown substantially over the past few years. As a result, it is well placed to alleviate loss of income and any expense caused by tenants who are victims of the credit crunch,” he added. “Many landlords understand this and are already covering themselves properly. Insurance should be high on every letting agent’s check list too, if they are to do their job properly.”

Premiums for rental guarantee and legal expenses are only payable on tenancies once they have been agreed and they are allowable for tax purposes.

Inflation fall makes December rate cut more likely

The fall in the Consumer Price Index to 4.5% has led Mortgages for Business to believe that rates will be cut further in December.

The buy-to-let broker has also stated that it wouldn’t be surprising if the Bank of England slashes a further 1% off Base Rate before the end of the year.

While the spread between LIBOR and Base Rate remains wide – three month LIBOR currently stands at 4.15% – mortgage rates will be slow to follow suit although the market is starting to see some improved pricing in residential mortgage rates. A couple of lenders this week have launched fixed rate mortgages at 3.99% and tracker rate mortgages are available from 4.39%.

David Whittaker, managing director at Mortgages for Business said: “Buy-to-let mortgage rates will be slower to return and it may not be until early next year when confidence returns to the money markets and lenders set their targets for lending in 2009. Rest assured, at Mortgages for Business we are in constant contact with all the main lenders and will send updates out to our clients as soon as there is some positive movement.”

Cautious optimism pervades landlords

In a poll taken at the most recent RBS Intermediary Roadshow held in Manchester, nearly a third (31%) of mortgage intermediaries thought that their landlord clients are taking an optimistic view about their prospects for the next 12 months and will be looking to add properties to their portfolios.

Nearly six in 10 (58%) thought that their landlord clients will maintain neutral positions over the next 12 months whereas only 10% felt that their landlord clients would take a pessimistic view and reduce the amount of properties in their portfolios. Only 1% believed that their landlord clients will be selling up and getting out of the market altogether.

Graham Felstead, head of sales, RBS Intermediary Partners, said: “Buy-to-let is one of the sectors of the mortgage market that is proving to be more resilient. With reductions in house prices and a robust demand for rental property, many landlords are viewing the current market as a good one for expanding their portfolios. At RBS Intermediary Partners, we are well placed to help cater for this interest as our NatWest buy-to-let proposition enables landlords to take out mortgages on up to 10 properties.”

Accidental landlords look to sell at realistic levels

The number of ‘accidental landlords’ who joined the lettings market in the summer as their homes failed to sell, are returning to the sales market with more realistic price expectations, according to Cluttons.

Thousands of vendors found they were unable to sell their property over the summer and opted to rent it out in the short term, in the hope that the market would recover in a few months and they would achieve close to the peak prices of 2007. However, Cluttons says reality has now sunk in and sellers are accepting that the market is not experiencing a short term dip, but a longer term house price correction, which has seen prices fall by approximately 25% from their peak.

James Hyman, partner for residential sales at Cluttons, said: “Those people who need to sell their homes are realising it is not an option to sit tight and wait for prices to recover. This is good news for the sales market, which has been stalled in part by the reluctance of sellers to recognise that their homes are worth considerably less than they were a year ago.

“Many sellers, who are not in a position to rent their property out in the long term, are now accepting that they are better off selling at current prices, as the market is unlikely to recover to previous heights for some considerable time. There are plenty of buyers out there at the right price, especially in the mid-market, with large enough deposits to access finance, and there are deals to be done with reasonable sellers.”

Look out for novice letting agents

A number of estate agents are putting landlords and tenants at risk by turning into letting agents overnight, according to Robinson & Hall. This is largely because some predict around 100,000 estate agents could lose their jobs by the end of 2008.

Plummeting house sales could force one-third of all estate agencies to close, and this is driving some to diversify into letting which is often outside their core expertise. To avoid being caught out by the risks that this rapid switch from sales to letting is causing, Robinson & Hall says landlords need to take note of the fundamental differences between estate and letting agents, or potentially face losing their hard-earned cash.

Kellie Marsh, lettings manager at Robinson & Hall, said: “Non-qualified letting agents do not have the protection of bonded clients’ accounts which means that the landlords they serve could lose their money. Letting agents should be members of the Royal Institution of Chartered Surveyors (RICS) or the Association of Residential Letting Agents (ARLA) which safeguard landlords and tenants by ensuring that rents and deposits are held in a separate protected account. We have heard of agents failing to hand over rent promptly, presumably because they are using their clients’ money to solve their cash-flow problems.”

She added: “Those using qualified letting agents with these protected client accounts are covered by the government compensation scheme. The serious state of market affairs means it has become absolutely necessary for landlords to restrict themselves to using established, reputable letting agents carrying ARLA or RICS membership.”

NLA doubts banks will pass on interest rate cuts

NLA Mortgages, the free sourcing and quotation system for landlords, has it’s doubts that today’s expected cut in bank base rate will encourage lenders to pass on the savings to landlords.

Simon Gordon, head of communications at the National Landlords Association, said: “It’s about time lenders started to play ball and pass these latest rate cuts on to landlords. Part and parcel of the Government bailout was the requirement for lenders to start lending to consumers. It’s critical for the health of the property market for landlords to have access to mortgage finance.

“Despite recent reductions to the base rate, there is very little evidence that banks and building societies are helping buy-to-let borrowers by cutting their rates. At a time where rental demand is on the up across the UK, many professional landlords will be looking to expand their portfolios, thus providing much needed housing.

“Demand for buy-to-let mortgages is high but landlords are being frustrated by a lack of suitable products. With fewer people able to get their hands on decent deals, there is a danger that the housing needs of many tenants will not be met.”

Slump in first-time landlords

Professional landlords are continuing to increase their dominance of the buy-to-let sector at the expence of the ‘first-time landlord’ according to research from Paragon Mortgages.

A panel-based survey of 200 mortgage brokers revealed the proportion of landlords either applying for portfolio extension mortgages or remortgages continued to grow in the third quarter of 2008.

Meanwhile, the number of first-time landlords applying for buy-to-let mortgages has fallen to its lowest level since the question was introduced into Paragon’s FACT survey in 2001. This suggests that growth in the buy-to-let market is being driven by experienced landlords building long-term portfolios rather than occasional investors or new entrants to the market.

In the three months to the end of September, intermediaries said that over half (55%) of buy-to-let business conducted was for remortgages, with 30% from landlords looking to extend their portfolios. Just 2.6% of business was for property substitution.

First-time landlords accounted for 10.6% of business during the period, down from 18.3% in the third quarter of 2007.

Financial advisers believe that the proportion of buy-to-let business they deal with will remain fairly steady during the final quarter of the year, with advisers expecting an average of 1.7% less buy-to-let business than the third quarter.

Of those that do expect buy-to-let business to grow, 63% said the main driver would be professional landlords picking up opportunistic property.

John Heron, managing director of Paragon Mortgages, said: “The number of first-time landlords entering the market is at its lowest level and perhaps that is a good thing in the current economic environment.

“Landlords with experience of the private rented sector are well positioned to take advantage of current conditions, particularly with rising levels of current demand. As these landlords are typically lowly geared, they are also in a strong position to pick up property at bargain prices when they spot the opportunity.”

He added: “Professional landlords represent the core of the buy-to-let market – they are the investors that base their purchase decisions on proven levels of tenant demand for long-term returns rather than speculative investment for a quick profit.”

Variable rates gain popularity

35% of residential borrowers took variable rate mortgages over the past three months, up from 24% last quarter, according to Legal & General research.

However, residential borrowers still prefer fixed rates overall – 63% took fixed rates, down from 75% last quarter.

Buy-to-let borrowers prefer variable rates – 55% took this type of mortgage vs. 43% on fixed rates.

Legal & General’s third report in the ‘Mortgage Purchase Index’ series analyses trends from over 19,000 mortgage applications made in the last quarter. It also found that the average residential mortgage was just 60% loan-to-value over the past quarter.

Two year fixed rates have become cheaper, but three, five and ten year products more expensive.

Stephen Smith, director of housing at Legal & General said: “As suspected, the popularity of fixed rate mortgages peaked last quarter when we found that three-quarters of borrowers were taking this type of mortgage, compared to 63% in Q3. Trackers will have attracted greater attention as forecasts of base rate cuts become more prominent. The popularity of variable rates has also perhaps been boosted by the number of borrowers sticking with their lender’s standard variable rate when they came to the end of a deal rather than remortgaging straight away. This approach of sitting on the fence is a sign of the times and would have been unheard of a year or so ago. Fixed rates over the past three months have been ‘expensive’ compared to the beginning of the year, although two-year deals have dropped somewhat recently.

“The average residential borrower has been able to put up a 40% deposit, which indicates that whilst there are many people with healthy levels of debt, there are now far fewer mortgages being offered with high LTVs. This has lead to the average LTV for residential borrowers falling throughout the year. On the other hand, the average LTV for buy to let borrowers has risen from 67% to 73%, showing that cash-rich landlords are taking advantage of the increasing demand for rental accommodation.”