Buy to Let stays strong

Its official

BUY TO LET RENTAL PROPERTY BOOMS OVER LAST DECADE

In the last decade buy-to-let property has taken the UK property market by storm. According to the Council of Mortgage Lenders, Buy to Let now represents approximately 10% of the UK residential housing market having grown from virtually nothing since 1997.

Statistics show that by the end of 2006, there were 850,000 buy-to-let mortgages outstanding, worth £94.8 billion, from only 28,700 less than ten years ago, nearly a 30 fold increase.

As a whole the UK rental property market has seen a massive boom over the last ten years despite periods within this time frame that have seen property prices in a large majority of the UK increasing by up to 200%. Low interest rates during this time frame have obviously played been key in pushing the property market to its highs.

Although in the current time Interest rates remain low compared to the mid 90's were interest rates in excess of 14% were recorded, (we have seen interest rates on mortgage borrowing as low as 6% in 1997), mortgage availability has diminished as globally, financial institutions bear the pain of the sub prime lending collapse which we have all come to know as the credit crunch. However, a percentage of mid sized property portfolios were purchased before the high house prices and they continue to offer the landlord good return on investment.

The property rental market in the UK was aided by the Labour Governments move to remove restrictions to the Assured Shorthold Tenancy agreement (AST) in the early days of the Labour government. Making letting property easier and signalling to the market that the Labour Government was not going to bring back the rent controls abandoned by the Tories.

The UK still has one of the smallest private rented sectors amongst the world’s industrialised nations, with the US having 32% of the residential market in rented housing and Germany a staggering 48%.

Stuart Law, Managing Director of property investment specialist Assetz commented on the performance of rental property versus the stock market during the Blair era:“Property has massively outperformed the stock market over the Blair years, generating huge returns for UK investors. With no gearing, property is up 186% from 1994 to end of 2006, while the stock market (FTSE 100) is up just 103% over the same period.“If property was purchased with a 15% deposit, then the results are stunning. Property has returned 1241% capital growth - 12.4 times your money as profit, while shares are up just 103% - twice your money.“Looking forward, I would expect ungeared property to roughly equal the stock market, but with less volatility. Over the next ten years the stock market is likely to be up around 115% (8% per annum), whereas ungeared property will be around the same in the region of 8% per annum. “However, geared buy to let investment is set to massively outperform equities again, but we are likely to see greater fluctuations in the short term. Geared buy-to-let property bought today with a 15% deposit and 85% loan would return 7.7 times the original cash deposit investment as profit (773% profit) on the basis of 8% growth per annum."

Mr Law continued:

“Property would only have to rise by 1.6% a year over the next 10 years to produce the same returns as equities before costs – something most investors think is very likely, given the supply and demand imbalance of housing in the UK today and for the foreseeable future.”“Property investment with large borrowings carries greater short term risk than just buying equities with no borrowings. However, in the long term investors are comfortable that in prime locations in the UK, there is a limit on new development and therefore there is only one way for prices to go over the next ten to 20 years. ”As long as investors take this long term view and do not over-extend themselves, they should do very well in years to come.”

Despite the current economic downturn landlords will find themselves with good portfolios of investment property which traditionally over time will see their initial investments returned. Letting agents are sure to see competition for landlord's buy to let rental properties increase as less mortgages are made available and more prospective tenants come on to the market looking for a rental property to dwell in. Landlords who have procured a decent portfolio of rental properties are sure to be well placed to ride out the economic storm providing they have bought wisely and can maintain good return yields on their investment property and have secured their income from their buy to let property with decent landlord insurance such as rent insurance (also known as rent guarantee) and other landlord products and services designed to maximise their return while ensuring any eventualities that would traditionally cause large financial impacts are covered.

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