CGT hike and falling house prices rein in confidence in buy-to-let

RICS confirms the age of renting

Residential property auction sales up while commercial lots are down

Lease lengths hit all time low

CGT hike and falling house prices rein in confidence in buy-to-let

Landlords’ confidence in buy-to-let has fallen in the last three months, but remains robust, according to the latest landlord sentiment survey conducted by LSL Property Services plc

The survey indicates that 42% of landlords believe now is a good time to invest in property, a slight drop from LSL’s last sentiment survey in Q1 2010 (48%). However, only 2% of respondents believe that now is a good time to reduce their portfolios.

One third (32%) of landlords polled are likely to expand their portfolio in the coming twelve months. The number of landlords considering leaving the sector has risen by 6% in the past three months to 19%. This figure also includes investors who are leaving the market through retirement or lifestyle reasons.

The survey evidence is supported by LSL’s latest Buy-to-Let Index, which reported the drop in total annual returns from 13.2% in April down to 10.1% in July.

David Brown, managing director of LSL Corporate Client Department, said: “Rising rents and house prices offered landlords bumper annual returns at the start of the year, and was reflected in a surge of confidence. This has fallen slightly following the slowdown in house prices and the recent capital gains tax hike. But the vast majority of landlords remain committed to buy-to-let. Attractive rents – just £12 per month shy of their peak - and increasing yields underpin their confidence in property investment.”

Growing tenant demand is helping to cushion slowing capital gains. 37% of landlords have witnessed an increase in tenant demand, with one in ten landlords reporting a substantial growth. Just 7% of respondents saw a decline in demand. 63% of landlords expect this increase in demand to continue in the next two years compared to the one in twenty landlords who anticipate that demand for rental property will fall away.

LSL say that although landlords recognise the slight improvement in buy-to-let lending in the past quarter, just one fifth of respondents (21%) mentioned the availability of cheap finance as a positive factor for buy-to-let investment – an increase of 8% compared to the previous quarter.

Brown continued: “Mortgage finance remains a daunting obstacle for those looking to get a foot on the property ladder. This is keeping thousands of frustrated buyers in rented accommodation, pushing up tenant demand and rents. But borrowing remains a thorn in the side of potential investors too. Despite a slight easing in lending in the last quarter, mortgage finance constraints are hitting landlords. Funding conditions remain tight for lenders, and lending to landlords won’t loosen significantly in the next two years.”

RICS confirms the age of renting

Increased tenant demand and a shortage of properties pushes rents higher, says the latest RICS Residential Lettings Survey.

RICS say that 26% more chartered surveyors reported a rise in demand for property rather than a fall, which was the second consecutive quarter that lettings demand has risen at a pace above the long run average. Tenant demand increased across all regions, but was strongest in London and the East of England. Continued difficulty in securing mortgage finance, worries over a double dip in housing and large deposits required by lenders are leading to higher numbers seeking to rent rather than buy.

As a result, rents increased for the second consecutive quarter, with 27% more surveyors reporting a rise in rents than a fall. Just a year ago the picture was very different, as an over supply of rental property in many locations pushed rents down and 29% more surveyors were then reporting falling not rising rents.

James Scott-Lee, spokesperson for RICS, said: “Supply of lettings property continued to fall in the three months to July, although at the slowest pace in a year which amid rising tenant demand has helped propel rents higher for the second consecutive quarter. Existing landlords keen to expand their portfolio may still be struggling to access the necessary finance despite improved market conditions.

“However, there is a possibility the lettings market could face a modest increase in supply in the coming months. The latest RICS Housing Market Survey shows a lack of funding has stifled demand from buyers which may cause some moderation to rents.”

John Heron, Paragon Mortgages managing director, said: “The RICS figures echo what we have been saying for some time – the private rented sector has to expand to meet growing levels of tenant demand. With fewer owner-occupier mortgages available, limited resources in the social housing sector and wider social and demographic changes, such as a growing population, increasing net migration and rising numbers of single person households, we are entering the age of renting. Unless the private rented sector is able to meet this growth in demand, rental inflation is likely.

“A thriving and responsive private rented sector is vital socially and economically, and at the heart of this is the need for active and motivated private landlords to invest in and upgrade private rented property stock. Unfortunately, the buy-to-let market is still focused on small scale landlords and failing to serve the needs of professionals who require finance for more complex investments, such as multi-unit blocks and Houses in Multiple Occupation. Until this changes, it is likely that we will continue to see supply failing to keep up with demand.” 

Residential property auction sales up while commercial lots are down

A new survey of the auction market in the UK suggests that the number of residential property lots sold and offered at auction has increased substantially during the past three months. However the commercial property auction market continues to struggle.  Although the number of commercial lots offered at auction has remained constant, the value of commercial properties sold dropped by 35.9% in July 2010 compared to July 2009.

The quarterly trends survey, produced by the National Association of Valuers and Auctioneers (NAVA) and EI Group, show that there were 3,018 residential property lots offered at auction in July 2010, representing a 50% rise on the 2,039 lots offered in June and 2,102 properties in May 2010.

The number of residential properties offered at auction has now risen above last year’s level, with 2,744 lots offered for auction in July 2009. The percentage of residential lots sold compared to lots offered has also increased, from 60.1% in June 2010 to 65.2% in July 2010, again suggesting an upturn in the market.

Melfyn Williams, chairman of NAVA, said: “These statistics confirm that the residential auction market has held up during the past couple of years and is now moving forwards, despite the difficulty in obtaining mortgage finance for many potential buyers. Our research also highlights the benefits of marketing your property at auction for homeowners struggling to sell.

“The auction industry however remains concerned about the levels of activity in the commercial auction market, and NAVA believes that more needs to be done to free up lending in the commercial property sector.

“Auction remains at the forefront of property transactions, usually displaying future trends in the marketplace. These statistics from NAVA suggest that the market, despite various contradictory reports, is improving.”

Lease lengths hit all time low

Average lease lengths on UK commercial property fell to their lowest ever recorded levels this year, falling by more than 10 months to just five years in 2010.

An independent analysis of 91,000 tenancies recently published shows that small businesses are increasingly signing shorter deals, with 81% on leases of five years or fewer and therefore unlikely to face a rent review. By comparison just over 3% of small businesses have a lease of over 10 years.

The thirteenth edition of the BPF/IPD Annual Lease Review also shows that 2009/10 was a significant year for rent free periods and break clauses as landlords and occupiers grappled with poor economic conditions. The move towards shorter leases, however, has been constant over a period of more than 10 years now also illustrating significant long-term change in the commercial property market and our economy.

The largest study of its kind ever completed, the data shows that a quiet revolution has been taking place in leasing practice since the early 1990s, when the vast majority of leases were what was called ‘institutional’, typically for 20 or 25 years, and often containing upward only rent reviews.

The data shows that the average lease length fell from 5.9 years in 2008/09 to 5.0 years in 2009/10. Lease lengths have therefore basically halved in the period since the Conservative Party last formed a Government in the 1990s.

Liz Peace, chief executive of the British Property Federation, said: “Leases have changed significantly over the past two decades with profound implications for landlords and tenants. For small businesses, shorter leases are probably a good thing, with the pace of business change so fast these days it makes little sense for most small and medium sized businesses (SMEs) to tie themselves into the obligations of a long lease. Shorter leases have undoubtedly meant fewer businesses found themselves in trouble during the recession and therefore were able to survive it.

"It is also important, however, that the property market is delivering variety. Long leases still play a crucial part in the funding of development of commercial property, even more so at this time when access to loan finance is severely rationed. The income certainty that a long lease with an upward only rent review provides is often what funds a major retail or office development, or regeneration scheme. Some larger businesses still want a long-term commitment to a building and if the lease is long they are likely to get a corker of a deal.

"You could say the last year has been an ‘occupiers market’, but actually the revolution in lease terms has been taking place quietly over the last two decades and the last year just reinforces that.”