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.”

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.”

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.”