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From The Times

April 11, 2008

There are still opportunities in buy-to-let

Professional landlords see value where amateurs fear to tread

Judith Heywood

Is buy-to-let dead?

No, but it is gasping for air. Lenders have suddenly turned very mean with all borrowers and property is now looking like a closed shop for new entrants. Gary Murphy, head of auctions for Allsop, says that their sales are as busy as ever: “We have seen a shift from the amateur to professional investors. Amateurs are no longer willing to invest because many have made fundamental errors, such as buying properties that were not going to let, or at inflated prices. Professional investors can now buy at prices that are regarded as realistic.”

Can investors borrow?

Yes, but options are increasingly limited. Moneyfacts.co.uk says that while a year ago there were 3,137 buy-to-let mortgages on the market, now just 852 remain. Typical deals now involve a deposit of about 20 per cent and rents that cover 125 per cent of repayments, according to Melanie Bien, director of Savills Private Finance. She says: “Rates have edged up but are still very competitive: instead of hiking them significantly, lenders are raising fees instead, with many charging high percentage fees or expensive flat fees. For example, Abbey has a two-year fix at 5.34 per cent with a £5,999 fee, while Alliance & Leicester has the same rate but with a 2.5 per cent fee.” These fees can be added to the loan, rather than being paid upfront, but interest will accrue. Bien says: “Novices should proceed with caution.”

What about big landlords?

Those with a portfolio of more than five homes are usually able to negotiate special deals with lenders. As Gary Murphy says: “Lenders will take into account their professional expertise when arranging finance.” These investors are holding out for bargains: the latest Association of Residential Letting Agents (ARLA) survey shows that values of investment properties have fallen - flats are down 3.2 per cent in three months, houses are 4.5 per cent lower.

Are rents rising?

Most landlords say yes. ARLA research indicates that rents have risen 4 per cent for houses and 2 per cent for flats in the three months to the end of February. Paragon, the specialist lender, says that rents have risen on average by 15 per cent in a year. And Jeremy Leaf, of the Royal Institution of Chartered Surveyors, thinks that they will continue to rise, as fewer new rental properties come on the market: “It's a double whammy for first-time buyers, who now can't get mortgages.”

Is that everywhere?

No, rent growth for flats has been suppressed by the oversupply of new-builds. Paragon says that apartment rents have fallen 1.6 per cent in the past year. But terraced house rents have jumped 23.6 per cent, semi-detached homes have jumped 22.3 per cent and detached homes 29.1 per cent. By region, rents have increased most significantly in East Anglia and the North West and South West, but were most subdued in Wales and the South East. In the North, they dropped 2.3 per cent.

Are landlords selling up?

Some observers thought advantageous changes to capital gains tax, which come in this week, would prompt a sell-off by overstretched investors, but so far the signs conflict. Kirsty Simpson, of the agent Palmer Snell in Yeovil, Somerset, says that more investor-owned properties are coming to market, but says: “Whether this is because of the CGT changes or because of the current market, it's hard to tell.” George Franks, of Douglas & Gordon, in Clapham, South London, says: “We're certainly valuing a lot more property portfolios than we were. Some buy-to-let investors are now seeing it as a good time to take advantage of the market and the tax advantages.”

Are there any hotspots?

Hamptons International has analysed buy-to-let returns in the South and found that, in the first quarter of this year, the best yields were in Islington, Kensington and the City in London, and Beaconsfield, St Albans and Brighton outside the capital. But Andy Wiggins, the head of buy-to-let at Bradford & Bingley, says that investors have become less active in London and the South East in the past year, with more buying up terraces and conversions in less-hyped northern cities such as Hull, Sunderland and Middlesbrough.