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.

Investors use bridging to finance bargain basement buys

Brokers have seen a 200% increase in demand for bridging finance in the last nine months as investors have been seeking bargains at auctions and through other distressed sales.

A number of smaller bridging firms have had to withdraw because of a lack of funding over the past year. However, unlike the mainstream market, the main bridging lenders have been able to offer a consistent supply of products without having to alter LTVs or rates dramatically.

Gary Booth, CEO at Tiuta, said: “Brokers that have adapted to the changing environment have been very successful in 2008. We are regularly seeing brokers place several cases a week as their more experienced buyers snap up bargains. With falling interest rates we expect this to continue as the primary residential market is still relatively static, but the demand for rental is increasing, which is creating a thriving market for brokers and their clients that can move quickly when opportunities occur.”

Scotland preparing for Home Reports

From the 1st of December, all houses marketed for sale in Scotland will need a Home Report. This is a pack of three documents: a Single Survey, an Energy Report and a Property Questionnaire. The Home Report will be made available on request to prospective buyers of the home.

The Single Survey contains an assessment by a Chartered Surveyor of the condition of the home, a valuation and an accessibility audit for people with particular needs.

The Energy Report contains an assessment by a Chartered Surveyor of the energy efficiency of the home and its environmental impact. It also recommends ways to improve its energy efficiency.

The Property Questionnaire is completed by the seller of the home. It contains additional information about the home, such as Council Tax banding and factoring costs that will be useful to buyers.

Richard Sexton, director of business development at HRS, a brand of e.surv Chartered Surveyors, said: “Home Reports will take some of the pressure out of buying or selling a house which as we all know can be a highly stressful time for everyone involved. Buyers will be reassured that they have been given all of the facts available to make an informed decision in their purchase and as a result sellers can feel more confident that the buyer is less likely to pull out.

“Despite the property market in Scotland falling, thus far, it has not been as severe as the English property market and house sales activity continues in Scotland, albeit at below average levels. Home Reports will be a big boost to the Scottish property industry and will encourage faster transactions and stronger relationships between all of the interested parties.”

Rents down as supply increases

Rents dropped across the residential lettings sector during the last quarter due to the increase in unsellable properties put onto the rental market.

The latest RICS Lettings Survey reports that the net balances of surveyors reporting new instructions to let both flats and houses (an indicator of supply) are now at historical highs.

50% and 68% more Chartered Surveyors reported a rise than a fall in new instructions to let flats and houses respectively.

The influx of supply onto the market has forced downward pressure on rents. The net balance of Chartered Surveyors reporting rises or falls in rents fell from a positive 31% in Q2 to a negative -12% in Q3, the lowest level in the survey’s history.

London and the South East have been hardest hit with the net balance of surveyors reporting rises or falls in rents for London houses falling from a stable 0% in the second quarter to negative -53% in the third quarter, while flats fell from a positive 5% to a negative -33%. However the biggest turn around was in the South East, with the net balance of surveyors reporting rises or falls in rents for houses plummeting from 53% to -33%. Equally, expectations for future rises in rents turned pessimistic for the first time since July 2002.

Demand for rental property remained positive in Q3. Housing transactions are at the lowest level since records began as banks continue to limit the availability of finance to the vast majority of buyers. 27% more Chartered Surveyors reported a rise than a fall in rental demand compared to 36% in the previous quarter.

RICS says the falling pace of demand can be attributed to the fact that many have now accepted their lot in the current climate and are sitting tight until the housing market picks up.

RICS spokesperson James Scott-Lee said: “The lettings sector has witnessed a boom in 2008 as sales in the housing market continued to slow. Many have been able to take advantage of rising rents to secure good returns. However, the market place has become more and more competitive as many vendors have been forced to become amateur landlords, creating an inevitable downward pressure on rents where supply has matched demand. With national average house prices set to weaken in 2009, yields may increase for those investors who can provide the right product for the right market place.”

Largest quarterly fall in Scotland for 16 years

Scottish house prices fell in the latest quarter, according to the latest Scottish House Price Monitor from Lloyds TSB Scotland.

In the three months to 31 October, the quarterly price index for the average domestic property in Scotland fell by 4% to give an average mix adjusted Scottish house price of £165,398. This is the largest quarterly fall in the 16-year history of the House Price Monitor.

On an annual basis, Scottish house prices have still risen by 4.9%, but this figure is significantly down on the 9.3% reported in the previous edition of the House Price Monitor.

The number of house purchase transactions within the Scottish House Price Monitor has fallen by 43% on the same period last year.

The market is becoming more differentiated with Glasgow reporting a quarterly rise while Edinburgh, Dundee and Aberdeen all show falls in the quarter. Outside the main cities, the South East excluding Edinburgh reports a modest quarterly rise while the other areas are all showing quarterly falls.

Turning to property types, flats continue to show the most robust performance, with a quarterly fall of 1.1% and an underlying annual increase of 4.7%. The sales of these lower priced properties continue to hold up well and offer some explanation for the quarterly rise in Glasgow prices. Prices of detached houses fell by 5.6% in the quarter while prices of semi-detached properties fell by 3.5%.

Professor Donald MacRae, chief economist, Lloyds TSB Scotland, said: “The Scottish economy is entering a significant slowdown with rising claimant unemployment and falling consumer confidence. The number of housing transactions has declined markedly since one year ago and the market is adjusting to lower prices and sales.

“Although the number of mortgage products has declined, the cost of borrowing has reduced for many mortgage holders with the latest fall in interest rates in early November. So far, the Scottish housing market is showing sensible adjustment rather than a precipitous collapse.

Equity release sales set to double by 2013

Norwich Union is predicting annual equity release sales to double to £2.4 billion over five years.

It has made a number of predictions as part of a report on the sector compiled to celebrate its 10th anniversary in equity release on 16 November.

Norwich Union believes that the market will see referral deals where consumers can access equity release products via large high street banks and building societies. This will build on an existing trend and lead to significant growth in this market over the next 10 years.

With these new entrants, the total value of equity release sales could double to £2.4 billion and a large number of new qualified intermediaries could enter the sector. However, as they raise the standard of equity release provision, it is likely that advisers who only ‘dabble’ in the sector will withdraw altogether and refer enquiries to specialist companies.

With key market drivers such as lack of pension funding, longer retirements and the government encouraging consumers to fund themselves, Norwich Union predicts that the quality of existing products will be improved upon.

As a consequence of the rise in indebtedness, Norwich Union foresees the introduction of products that enable consumers to transfer directly from a residential mortgage into an equity release plan. It believes that these are likely to be provided by the existing players in the equity release market, “as they have the expertise and back office systems to administer them”.

With one in three consumers over 55 still owing money on their mortgages, Norwich Union believes that they are likely to be hugely popular and of real benefit to consumers.

As equity release becomes an increasingly accepted retirement funding tool, Norwich Union believes that traditional pension and inheritance tax planning specialists will add this product to their ranges – via white label deals with existing providers.

It also believes that the government is also likely to become more involved in this market as it starts to work more closely with consumers and providers to solve the UK’s retirement funding crisis.

The type of property that people can use for equity release is also likely to widen – however with certain inherent stumbling blocks – this move may not happen for several years.

Anthony Rafferty, head of marketing, post retirement at Norwich Union, said: “We have been one of the leading providers in this market for 10 years and have seen many developments and changes. We have helped over 80,000 customers release £2.8 billion worth of housing equity, which has significantly improved the quality of retirement for many consumers.

“Going forward, we see the market doubling over the next five years and truly coming into its own as a mainstream retirement planning tool. With big high street names offering these products to their customers, more intermediaries gaining the necessary qualifications and equity release innovations taking into account consumers changing needs – the future for this market is bright.”

Over this period the average value of a property used for equity release has moved from being almost £40,000 (1999) more expensive than the average property to just over £22,000 (2008). This shift clearly shows that thousands of ordinary UK homeowners are now using these products to help fund their retirement – equity release is no longer simply for those with huge houses and relatively high property values.

Over this period, Norwich Union has also seen significant product innovations as lifetime mortgages dominated the market and drawdown mortgages were introduced. Drawdown products that allow consumers to reserve a ‘pot of equity’ to release in the future now account for almost 60% of Norwich Union’s sales – highlighting the importance consumers place on flexibility.

As the market has grown and developed over the last 10 years, Norwich Union has also found that distribution channels have expanded and developed with more intermediaries entering the market, direct sales forces growing and some financial services partners on the high street entering referral deals.

Plenty of housing equity for over 65s still available

The latest findings from Prudential’s Equity Release Index show that despite falling house prices, homeowners aged 65 and over still have £692.06 billion of equity in their homes.

Prudential’s Index, which tracks the amount of equity held in the properties of people aged 65 and over in England and Wales, found that 42.45% of this equity belongs to those living in London and the South East.

Prudential’s Index reveals that the value of property equity belonging to homeowners aged 65 and over fell by £34.37 billion between May 2008 and August 2008, with the average homeowner aged over 65 seeing the value of equity they have in their home fall by £9,119. Homeowners in London, aged 65 and over, saw the highest decline for any region in England and Wales with equity in their homes falling by £18,094.

Keith Haggart, director of lifetime mortgages, at Prudential said: “Every homeowner is being affected by falling property prices, but it’s important to remember that many people, especially retired homeowners, bought their homes years ago and have benefited from growth in the housing market. Even in this falling market, the vast majority of retired homeowners still have considerable wealth tied-up in their properties.

“Despite the recent falling costs of petrol, retired Britain has the highest rate of inflation and still faces a significant rise in the cost of living. For these reasons, more people are looking to release equity from their homes to maintain or improve their standard of living in retirement.”

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.”