Bye Buy-to-Let?
‘We can’t all make a living selling hamburgers to each other,” argued those who bemoaned the decline of manufacturing and the rise of the retail sector in the 1980s. Neither, it turns out, can we all make a living renting out flats to each other. Ever since the dotcom bubble burst in 2000, buy-to-let has been the favoured vehicle of private investors. In four years, many have doubled their capital. Moreover, in contrast to stock market investments, it is easy to “gear” property developments: that is to say, build an empire on borrowed money. It is not uncommon to hear of individuals who have bought 20 buy-to-lets, financed with �2 million worth of borrowing. Such a portfolio is only sustainable if the rental income covers the mortgage repayments. Should it fail to do so, such investors face not just negative equity, but ruin.
Two reports published by leading estate agents last week show how perilously close some investors must be to this fate. Rents in central London, according to Knight Frank, fell by 3.9 per cent last year, following falls of 10.4 per cent in 2002. This has brought the average gross rental yield on a Central London property down to only five per cent. The average net yield, after expenses, is just 3.25 per cent. A year ago, it was possible to take out a fixed-rate mortgage at a similar interest rate and to cover mortgage repayments with rental income. As the cheapest mortgages are now well over four per cent new buy-to-let investors must subsidise their mortgages with other income.
Worse lies ahead. Not only are mortgage rates likely to rise by another three-quarters of a percentage point by the year-end, the stock of rental property is rising at such an alarming rate that investors will do well to find tenants at all. According to Hamptons International, the number of available rental properties is 50 per cent up on a year ago. The company sees the first signs of significant numbers of buy-to-let investors opting to sell instead. That should reduce the imbalance between landlords and tenants, but only at the cost of increasing the number of properties for sale. It is hard not to feel that something will to have to give, and that is price, particularly among the new apartments favoured by buy-to-let investors.
What’s the moral of this tale?
Actually, this is not intended to be a tale of woe. Just to highlight the need to buy property rental property carefully. Too many people are just jumping in with both feet. Becoming a landlord should be viewed as a long term investment, and over the long term, I believe we are seeing a structural shift in supply and demand in favour of landlords.
We advise our clients how they can apply a buy to let formula which helps them to assess whether a property will likely make a good investment from the numbers point of view, no matter how sweet the honeysuckle or how idyllic the view. The mantra really does apply “the right property, in the right location, at the right price”.
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