Vantis warns landlords to negotiate with lenders as repossessions rise
Accountancy, tax and business advisory group Vantis is urging buy-to-let mortgage holders to ensure dialogue with lenders is started early if they are struggling to meet monthly payments, as repossessions reach record levels. In November, the Department for Constitutional Affairs released figures for mortgage repossession actions entered in the third quarter 2006 of 34,626, a rise of 15% on the same period last year.
However, Frank Wessley of Vantis Business Recovery says most mortgage companies will often allow landlords some leeway rather than instant repossession in order to avoid the costs of repossession and sale.
He said: ‘‘Supply is outstripping demand in certain areas and landlords aren’t generating the incomes they anticipated. We would urge investors to talk to their mortgage provider immediately if they have concerns. They may be able to negotiate a longer term or even a different product to make repayments more manageable.’’
According to Wessley, part of the problem lies in amateur investors failing to factor in costs such as buildings insurance, maintenance and management fees or void periods when the property stands empty between tenants.
The situation looks set to worsen, too, with the Council of Mortgage Lenders (CML) forecasting higher levels of arrears and repossession to come. The CML expects 130,000 mortgages to be more than three months in arrears by the end of 2007, up 10,000 on its previous prediction. Furthermore, the CML's estimate for repossessions has been increased by 25%, to 15,000 repossessions in 2006 and 2007 apiece, from the 12,000 predicted in February.
Industry warnings have prompted lenders to tighten their lending criteria on new-builds amid concerns that valuations have been too flattering because they failed to take into account separate incentives offered by developers. There have also been concerns that an oversupply of rental units in some developments has been depressing yields. Last year, Portman Building Society became the first lender to refuse to offer buy-to-let mortgages on new-builds. Several lenders have increased the deposits required on buy-to-let mortgages for new-builds to 25% of the property’s value, compared with standard minimums of 15%.
Edinburgh asks for more tram cash
Council chiefs in Edinburgh have reportedly requested further funding to ensure a tram line can be built from the city centre to the Granton waterfront.
Transport officials believe there will be enough money to provide a tram network from Leith to the airport by late 2010, with a spur from Haymarket to Granton one year later. But if they use up the £545m they already have, more cash will be needed to pay for the second line.
It is predicted that an extra 5,000 public transport passengers will travel southbound on Leith Walk between 2011 and 2031 in the two-hour morning peak period, leading to major bus congestion in the city centre unless trams are introduced.
It is also estimated that around £120m will have been spent on the tram project by the end of 2007.
Council leader Ewan Aitken said: "This really is the start of an exciting transport revolution and, in the future, I can envisage a more extensive tram network within the city and beyond. Phase two is closing the loop at the Waterfront and phase three is a link to Newbridge. Future ambitions include lines to the Edinburgh Royal Infirmary, Newcraighall, Livingston, Dalkeith, Musselburgh and Queensferry."
The council's finance director, Donald McGougan, said economic development in Granton and the surrounding areas would be accelerated as a result of a direct connection with central Edinburgh.
Warm Climate in early 2007?
Fionnuala Earley, Nationwide's Group Economist, recently said that: “Both housing market and weather forecasters were surprised by the warm climate in 2006. The temperate weather is likely to have played only a minor role, but the UK housing market clearly warmed up during the year.
"House prices increased three and a half times faster than last year and returned to double digits for the first time since February 2005. December’s increase of 1.2% brought the annual growth rate up to 10.5%, way above the widespread expectation this time last year that annual house price growth would be in low single digits. The price of a typical house increased by the equivalent of £45 per day in 2006 - three and a half times faster than the £12.50 per day in 2005 - bringing the price of a typical house up to £173,746."
Nationwide say that evidence from estate agents, continues to show that supply conditions are tight with fewer sellers coming to market. Stock to sales ratio – a good leading indicator of house prices – has continued to increase suggesting a few more months of firm price growth.
However, Earley expects to see “worsening affordability and recent interest rate hikes to affect the levels of activity in the market in the coming months. This will feed into a slower rate of house price growth in the second half of next year. The number of estate agents reporting an increase in new buyer enquiries fell back sharply in November, and while this is a more volatile indicator of house purchase approvals, it does lend some support to the view that we will soon see the start of some weakening in demand.”
REIT Warning
The New Year has started with a bang for two large property firms as Land Securities shares increased by 0.9% to 2,343p while rival British Land's shares shot up by 1.2% to 1,735p.
Around 10 listed property firms have now agreed to become REITs, investment trust funds that will pay very little or no tax, as most of their earning will be paid out to shareholders as dividends. These are British Land, Big Yellow, Brixton, Great Portland Estates, Hammerson, Land Securities, Liberty International, Primary Health Properties, Slough Estates and Workspace.
Justin Urquhart Stewart, director of Seven Investment Management warns that: "Investors need to be extremely careful about going into REITs at what looks like the top of the UK commercial property market. These are starting to look like a current (investment) fashion fad and we all know what can happen to fashion fads."
The UK commercial-property market has certainly been in investment boom mode in recent years. In 2006 the market beat all expectations with total returns of almost 20% according to IPD, while in 2005 it had shown total returns of 19.1% (IPD). However as prime commercial property rental yields have shrunk towards 4%, some market analysts are commenting that the UK boom could now be over or even start to reverse as 2007 unfolds. The outlook for interest rates in 2007 will of course play a key role and influence investor confidence levels, if as is being forecast, we experience further increases in UK base rates.
4% Growth in 2007
Commenting on the latest Halifax monthly house price index Martin Ellis, chief economist said: “UK house prices fell by 1% in December, but it remains too early to conclude that this indicates a genuine slowdown in the housing market. Overall, prices in the final quarter of 2006 were 4.2% higher than in the previous quarter, marking the strongest quarterly rise since Q2 2004.
“Continued economic growth, rising employment and an ongoing lack of supply will continue to drive up house prices over the coming months. Higher interest rates, greater pressure on household finances and subdued real earnings growth will, however, constrain housing demand. We now expect house prices to increase by 4% in 2007.”
Halifax says that house prices increased in all regions during the fourth quarter. The biggest price rises were in Northern Ireland (15.9%), Greater London (6.6%) and Wales (5.1%). The smallest increase was in the North (0.9%).
Halifax say that the housing market is underpinned by a healthy economy with the latest ONS figures confirming that gross domestic product (GDP) increased by 0.7% for the fourth consecutive quarter in Q3 2006, slightly above the long-term average rate of growth. Household spending growth, however, slowed to 0.4% in Q3 from 0.9% in Q2. Real household disposable income growth also eased, rising by 0.2% in Q3 following a 1.0% increase in Q2.
The number of people in employment continues to rise with a 216,000 increase over the past year to a record 29m in the three months to October, according to the ONS. The number of people in full-time employment, however, fell by 93,000 between the three months to July and the following quarter, suggesting a possible weakening in labour market conditions.
Buy-to-let to grow by more than 20% in 2007
Paragon Mortgages boss Nigel Terrington believes the buy-to-let mortgage market will grow by over 20% this year, according to the Evening Standard. Terrington believes the market will soon shrug off fears of more interest rate rises and of a housing price bust.
The report stated that ‘the £30bn buy-to-let boom is here to stay because rich fortysomethings want an investment substitute for their bombed-out pensions while at the same time there is soaring demand from twentysomethings who want to rent because they have no intention of settling down yet.’
Paragon Mortgages and Mortgage Trust reported an 82% explosion in lending advances to £3bn to the end of September 2006 and a 15% rise in profits to £82m. The company’s market share has grown from 5% to 10% as a result.
Terrington says that the average buy-to-let investor is ‘someone in their late forties from a high socio-economic AB status who is financially experienced and astute and who is in the investment market for the long-term.
'These are people who have increasing concerns over their pensions and want to invest in something they understand, in fact probably know quite a lot about, something they can control and manage. That is property. Most buy-to-letters buy within their vicinity because they know their home market and they are looking to build on their initial investment.'
