The past few weeks have seen several encouraging signs of a revival in the buy to let property market. One came from British Land Plc, a large investor that usually puts its money into office towers and big shopping centres. It recently agreed to manage a £300 million residential property fund that will invest in properties that will be let. It reckons that the withdrawal from the market of private landlords is leaving a gap.
Now this is especially good news for private investors because big companies such as British Land usually have really high fixed costs and expenses. One might think that a large company could be more efficient but if one then considers that they have to have layer after layer of management and bureaucracy, then for them to profit from lots of small investments such as these means that the expected returns have to be pretty high. I’d guess they have done their maths and come up with some pretty attractive targets for investment returns for them to even bother looking at this market again. According to a report in the Financial Times, they are targeting returns of 14.5% a year. That’s not too bad and one has to imagine that with a lower cost structure a private investor with a small buy to let portfolio might have a good chance of beating it. They reckon that most of these returns will come from capital growth. If you’ve been following this site, then you’ll know that I still think investments have to be selected to produce cash on a monthly basis and that capital growth is just the bonus at the end.
They are hoping to buy about 500 properties with an annual rental yield of about 3.5%, according to the article. Most of these homes will be upmarket costing about half a million pounds with some costing up to £5 million. Those sorts of prices are way out of reach of the average buy to let investor, who would target properties of about £125,000-£175,000, but it is still encouraging.
Banks starting to lend
More encouraging news comes that the number of mortgage products available for buy to let has increased again. Many of these buy to let mortgages are aimed at professional landlords with portfolios of about 30 properties. The banks are also quite specialised. So this doesn’t mean that the money taps are being opened again. Far from it. But this thawing in the market is certainly a sign that banks are more prepared to put their toes back into the buy to let market.
They must have been encouraged by new research that the market seems to have turned. A report out recently from LSL Property Services said that the average return on investment in 2009 was 7.6% compared with a loss of almost 9% the year before. In hard numbers they reckoned that people made almost £8,000 in rental income on average last year and made another £4,800 in capital gains on each investment property. They are forecasting net returns of almost 10% this year or a total return of almost £16,000 on average. Not bad compared with a year ago when people were nursing huge losses.
In America house prices have also been recovering fairly steadily since they hit rock bottom in spring last year. Prices had picked up towards the end of the year but mortgage approvals slumped in November. This is despite the fact that there are generous tax benefits for home ownership in the United States because by using the right tax planning stragies homeowners get to write off their mortgage interest against normal income (not just rental income, as in the UK). Even so, housing starts also fell in November and December and some economists worry that house prices there may start to fall again. That should be a warning to buy to let investors in the UK of just how fragile the recovery in porperty markets is.
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