Baron Rothschild, the founder of the famed family-owned investment bank that made its fortune during Britain’s Napoleonic Wars with France, coined the famous saying that: “the time to buy is when there is blood in the streets.” The question facing many residential property investors in Britain right now is not whether there is blood in the streets, but whether enough has flowed to make it safe to invest in Buy-to-Let properties again. No doubt there will be money to be made from buy-to-let in the UK, but if investors get their timing wrong they face the very real risk of finding that it is their own blood pooling in the gutters.
By many indications the market is still falling sharply. Take the case of Fergus Wilson and his wife Judith, two British maths teachers who between them built a staggering empire of buy-to-let homes with more than 700 properties in their portfolio. Little wonder then that they were dubbed the king and queen of buy to let by the British press. Yet this massive investment portfolio, which at one point reached 900 properties and was worth more than 225 million pounds to them net of debt, has come under enormous pressure in the downturn. Last year tenants in almost 100 of the properties were missing rental payments. Many had lost their jobs. Banks were threatening to take back the properties. Now the whole portfolio is in a sort of managed run-down with the Wilson’s trying to sell what they can without dumping properties. Provided markets hold up they may be able to salvage something. But their experience should be a warning to new investors. The fact that such experienced investors with such a diverse portfolio and with significant capital are experiencing difficulties does not auger well for the state of the market. Especially since the Wilson’s invested in sections of the market, mainly small family-sized buy-to-let houses, that were thought to be far more stable than some such as city-centre flats. The first lesson of their experience is that unless you have deep pockets and the ability to ride out a downturn and significant period of negative equity then now may be a risky time to invest indeed
The second lesson is that the Wilson’s first started building their empire in the early 1990s when Britain was suffering a previous and deep property downturn. Mr Wilson initially started buying houses at deep discounts on auction during that downturn. He was then able to immediately lever them up by getting them valued for more than he had paid and getting 100% mortgages over the properties. Interest payments were then entirely made using income from renting them out. In fact he didn’t put any of his own money in since he had 28 days after the completion of the auction to line up financing. It is an amazing tale of an empire that pulled itself up by its own bootstraps. Yet the second lesson here is about timing. One would think that Mr Wilson knows a thing or two about property downturns, having started to make his fortune buying houses during a particularly deep one. If he is now selling it probably suggests that he thinks prices may well fall further.
That’s the bit about blood in the street. The bit about why the buy-to-let cycle may be turning up is found in recent indications that rents are increasing, which would lead to improved rental yields for buy to let properties. The latest survey released in mid March 2010 by the Royal Institute of Chartered Surveyors (RICS) showed that the supply of new rental properties coming onto the market has slowed for a second quarter in a row and that rents seem to have stopped falling for the first time in more than a year and a half. Many of them now expect rents to start rising. This suggests that many unwilling landlords who put their properties out to rent because they didn’t want to sell into a falling market are taking advantage of the recent blip in property prices to sell. This is a positive development but it is not unmitigated good news for landlords. This is because property prices have picked up so that rental yields in many areas still look unattractive.
The recovery in housing prices also looks dangerously fragile with the real prospect of a big dip in house prices coming as soon as the Bank of England starts to increase interest rates. There may be plenty of buy-to-let blood on the streets, but perhaps not enough to get people to start buying.
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