It was, on the face of it, an unlikely backdrop for a revolution. When some 200 journalists, estate agents and mortgage brokers gathered in the RAC club, a grand Edwardian pile on Pall Mall, on September 26, 1996, few of those present can have expected that what they were about to hear would revolutionise the British property market.
Assembled before them were representatives of four of the country’s leading mortgage providers, and what they had to say was quite simple: henceforth, people who wished to buy property as an investment would find it much easier to obtain a mortgage and would no longer be charged a punitive interest rate for the privilege. There was even a catchy name for the scheme: “buy-to-let”.
“The entire media took off with the idea,” says Malcolm Harrison, of the Association of Rental Letting Agents (Arla), which helped launch the scheme. “It was just the right product at the right moment. We were coming into low inflation and interest rates, and people were wondering what do to with their savings.
“They weren’t natural stocks people. But they could understand and control an investment into rental property, and that was the key: it was about personal finance, but it was also about property.”
A decade later, the concept launched that September lunchtime has turned into one of Britain’s 10 fastest-growing industries. Tens of thousands of us have been tempted by Arla’s carrot of “reasonably certain capital growth” (and the handy by-product of rental income) and have invested in an activity now worth, at a conservative guess, about £140 billion. An estimated 700,000 properties in the private rented sector are now financed by private buy-to-let mortgages.
With house prices in the main cities of Britain having risen two- and threefold in the intervening years, anyone who raced out after the meeting to slap down a deposit on a rentable property more or less anywhere in Britain will have made a significant capital gain.
Some have bought a single property as a supplement to their pension; others have amassed portfolios of such size that they have long since given up their day jobs, joining the burgeoning class of professional landlords. Others have diversified abroad, trying to replicate their success at home in overseas markets.
The baton of rented property ownership has passed from giant landlords, or institutions financed by commercial loans, to small-time operators: you, me, and the chap down the road; low-end investors who favour bricks and mortar over some risky hedge fund.
The impact has not been all positive, however. To their critics, buy-to-let investors have not only benefited from the property boom, they have also helped to drive it, putting once modestly priced one- and two-bed flats that traditionally formed the first rung on the housing ladder out of the reach of first-time buyers.
People, meanwhile, have continued to invest. The Council of Mortgage Lenders said last month that the number of buy-to-let mortgages taken out this year was up 17% on 2005 (although a significant number of these would have been refinancing existing properties).
Yet with prices stabilising and interest rates rising, is buy-to-let still as safe as houses, or is it an idea whose time may finally have run out? Even posing such a question would have been unthinkable to many of those gathered at the RAC club. The seeds of change had actually been sown eight years earlier. The 1988 Housing Act introduced a new kind of rental agreement known as the assured shorthold tenancy, effectively eliminating the prospect of the sitting tenant — the dread spectre that had long hung over the rental property market.
Then came the cataclysmic drop in house prices of the early 1990s. Galloping negative equity and high inflation led to a rash of repossessions, meaning people were out there looking for somewhere to live. Yet the existing private rented sector was rapidly losing landlords (because they, too, had suffered from the housing crash) and the social rented sector was too inflexible to deal with a sudden high level of tenancy demand.
A solution arose in the 1996 Housing Act which, once and for all, tidied up any possibility of inadvertently allowing in a sitting tenant. This was the clarion call to the mortgage lenders, and capitalist zeal was there in a trice, quickly inventing a resolution to the problem.
“We were trying to work out how lenders and lettings experts could help expand the amount of rented accommodation in the country,” says John Heron of Paragon Mortgages. “We realised we needed to encourage private investors into the idea of owning rented property. There is nothing new about buying property and letting it. But inventing buy-to-let gave it a new, sharp focus.”
Rather than wring their hands over Equitable Life, investors could now find a nest egg into which they could pop their savings and also decorate with soft furnishings. And the tenants were out there — not just those who had lost out in the property crash, but a whole new sector, young people who had no intention of buying property themselves. “In a survey of property owners, the 18-25 age group came out strongly as a group that no longer regarded homeownership as the key,” says Heron.
Developers such as London’s Manhattan Loft and Manchester’s Urban Splash started building blocks of sexy inner-city flats. In almost every British metropolitan centre, glass and chrome residential towers began to appear; with Sex and the City providing a cultural backdrop, rented city living and walking to work became hip.
And if your apartment was done up with contemporary-style furniture from Ikea (rather than antiques), and owned by a Mr Smith or a Mrs Patel willing to come out on a Sunday and sort out the drains, rather than some huge, nameless corporation with a two-week wait on repairs, then so much the better.
The effect on the nation of the buy-to-let craze has been astonishing. Property has become regarded as a natural alternative to the classic pension. “There is now a lack of trust in the financial sector,” says Justin Urquhart Stewart, an investment specialist, “and people have looked round for something more certain.
“They want something they can touch, and think they understand. Property fits the bill. More than 50% of my clients now have investments in properties other than their domestic house. Ten years ago, that figure would have been about 10%. And a high proportion, probably about 25%, now use property as an alternative to a traditional, insurance-based pension scheme.”
Urquhart Stewart is a flash London money man, whose red braces and prime central London address indicate a rarified sort of clientele. Indeed, there are now plenty of property millionaires for the likes of Urquhart Stewart to work with; landlords like Fergus and Judith Wilson, former maths teachers who now collect racehorses for a hobby and estimate they buy a property a week. They say their buy-to-let portfolio is worth £135m.
Yet the great power of buy-to-let is that it also has the common touch. It is the investment everyone understands. It speaks to people who might never have thought of themselves as investors, or who might well have considered their pension as the business of their boss, or the state.
Take Jill Bugie, 44, who lives in Windsor, where she runs an internet discount shopping club. She owns and rents out five flats, a house in Windsor and a villa in Spain. Her £3.2m buy-to-let portfolio has transformed her life. “As a divorced mother of two, there is no way I could have the type of home I now have without buy-to-let,” she says. “Ladies on their own don’t normally end up in this sort of position. Buy-to-let has not only secured my future, but also ensured my family has a far nicer home than we would have otherwise had.”
With no other investments, bar a tiny pension, Bugie might appear to be a risk-taker. She doesn’t see it like that. “I’ve remortgaged, and reinvested as the value of my flats has gone up. But I’m not very heavily geared (meaning her loan-to-value percentage is not very high). And I’m going to continue. I’ve heard about a development in Eton High Street and I’m keen to buy there.
“I like buying a flat every other year. I bought a house two years ago for £625,000 and lived in it for nine months. It is now worth £725,000. I haven’t spent a penny on it, and the rent pays the mortgage. Where else could you make a tax-free capital gain of £100,000 in 24 months? Buy-to-let is the best thing I ever did.”
Stuart Cowie, a professional squash player in his early thirties, had a somewhat grim first experience of buy-to-let, since his tenant bestowed 12 months of unpaid rent, stolen goods and a trashed house upon him. She eventually left when served with an eviction order.
Cowie was undeterred, however. He now owns two flats in Essex and one in Canary Wharf, with a total value of £700,000. “It’s given me a start in the property market, and the rental income has covered my outgoing costs,” he says. “It gives me a sense of security for the future. I think it’s something to be proud of.”
There are also, of course, horror stories out there: tricky lettings agents who levy their charges upfront and then vanish when problems arise; abusive tenants; irresponsible developers; and the newly invented torture of the syndicate, a “property club” that buys units in a heavily discounted off-plan venture. Sometimes it works fantastically but, at other times, when the building is completed and members are required to stump up, it transpires the building is unlettable and wholly undesirable.
The craze has also encouraged a stampede of buy-to-let seminars, boot camps and “training weeks”, where buy-to-let hopefuls are charged thousands of pounds for smoke-and-mirror sessions led by a parade of carpetbaggers who further their arguments with shadowy pictures of a Mrs X or a Mr Y, anonymous investors who have made £400m without a single down payment.
Then there are disgruntled first-time buyers such as Leila Boyd, 35, a PA in the music business, who has just bought a two-bed, former local authority-owned house in west Kensington for £258,000. And that after a year of looking.
“I would say that the competition for properties has definitely increased because of buy-to-let,” says Boyd. “I went to a property auction and the number of people bidding was far more than I was expecting. The property I was going for went out of my price bracket, and to someone I would say was clearly an investor. I was fed up, because I felt the investment market was pushing up the prices.” Even regular sales are being commandeered by buy-to-let merchants.
“When I was being shown around houses, agents would comment that they were also showing to investors,” she says.
Paragon’s John Heron rejects the charge. “The buy-to-let market only represents 7% of the housing market,” he insists. “It has brought far better choice and quality to tenants, and taken pressure off the social rented sector.”
So, tenants have done well out of the private investor wading into what was previously a grim sector run by the Rachmans of this world. And private investors have done more than well. But what about those who are planning to jump in now? Should we continue keeping faith with buy-to-let, or is it a bubble or an accident waiting to happen? David Salusbury, chairman of the National Landlords Association, warns against regarding buy-to-let as a pot of gold. “Buying a property should be undertaken as a long-term investment, and if you are interested only in capital growth you should be even more careful, because the prospects of steep capital growth are receding. But it is, nevertheless, a way of making private pension provision and has diversified the ownership of rented property.”
Chris Town, of the similar-sounding (but different) Residential Landlords Association, has two warning for amateur landlords. First, regulations have caught up with the property investment craze. “Up to the last couple of years, the private rented sector was basically a cottage industry,” he says. “Those days are coming to an end.
“The 2004 Housing Act has brought in regulations with regard to houses of multiple occupation (HMO) and other reforms, such as fire safety. Sanctions for not complying with regulations can be severe. We think, at the moment, only about 25% of HMOs have an application for a licence. So 75% of landlords with an HMO are breaking the law.”
Second, watch out for that inner-city lifestyle that was so fashionable 10 years ago. It’s still fashionable, but there is too much choice out there.
“You need to have a good look at the market,” says Town. “Some northern cities have suffered from overdevelopment, blocks being sold on the back of the buy- to-let craze. Leeds has 4,000 new units in the city centre, with only 50% occupancy — those are the council’s figures. And thousands more are about to be built. It’s a trend that has been replicated in Manchester. If I was investing, I would probably go to the suburbs and avoid the city centre until it settles down.”
Jonathan Morgan of Morgan’s estate agency in Leeds is outraged. “He can’t substantiate that!” he says. “Out of the 700 rental flats we manage, we have about a 6% void (ie, no tenants).” Morgan concedes Town does have a point, however. “Most developers have jumped on the buy-to-let bandwagon and delivered a quality that owner-occupiers might not accept. They are now moving away from rental-type properties. Developers such as Isis, which has two schemes in Leeds, are addressing just this point, with larger apartments and more green space. They call it buy-to-live, not buy-to-let!” Yet, although developers may be calming down, investors are still keen to exchange contracts. City-centre flats have not fallen dramatically in price, and rents, say the lettings agents, have firmed up.
Nor is the supply of tenants likely to dry up, especially in London and the southeast, thanks to the continued strength of the City, which continues to act as a powerful magnet for foreign job seekers with good money to spend on rents. There is already an estimated shortfall of 500,000 residential properties in Britain, and a need for 60,000 more, per year. Analysts have predicted the private rental sector will expand from its current level to answer for 15% of all housing stock over the next 10 years. Will the small-time buy-to-let landlord be part of this growth? It’s hard to see why not.
Apart from anything else, it’s the only investment that you can go and walk around in. The physical feelgood factor is probably the most important quality in buy-to-let investing.
“Psychologically, owning property makes you feel good,” says John Stapleton, the television presenter, who with his wife, Lynn Faulds Wood, owns three buy-to-let flats with a total portfolio value of £1m. Neither he nor Faulds Wood (currently bowling around on BBC1 with Esther Rantzen) aim to be full-time landlords, but their flats make them feel content.
“Buy-to-let gives me the comfortable feeling that I have access to my money,” he says. “Pensions lock your money up. And while the value of property always seems to go up, a pension depends on the stock market, which is much more volatile. It is so much more personal than having a pension fund — it is your thing.”
Commercial breaks
Buy-to-let is not just about residential property. Amid signs that the housing boom is coming to an end, thousands of investors have turned to commercial property in search of higher returns. They are buying shops, offices and industrial units and renting them to businesses for yields of up to 10% — about double what they can obtain from flats and houses.
Commercial property auctions aimed at the general public, which are held several times a month in London, are drawing about twice the number of people they did a decade ago when business property prices were low. Investors are snapping up everything from former banks to phone-mast sites.
One of the big draws is that business premises, unlike residential property, can be held in a personal pension, so investors can get tax relief towards the purchase price.
Commercial property is not without risks, however. There is a growing danger that, just as in the housing market, the flood of money from individual investors could take prices to dangerous levels.
