Confidence Riding High Among Landlords

Is the future bright for buy-to-let investors in 2008? Let's take a look at the outlook for the sector over the next 12 months.

Has the buy-to-let bubble burst?

In short, it would appear not. That's if we believe the hordes of statistics which have popped up over the last few weeks. Specialist buy-to-let (BTL) mortgage lenders and lettings agents alike are telling us landlord confidence is riding high. Even the threat of falling house prices has done little to dampen the spirits of residential landlords, with nine out of ten saying they have no intention of selling up any time soon.

That's according to the Association of Residential Lettings Agents' (ARLA) latest survey. Its quarterly Review and Index reveals most landlords intend to hang on to their property portfolios for the long-term (almost 17 years on average). What's more, 4 out of 10 plan to invest in further BTL opportunities, even though the credit crunch may make it more difficult for them to finance future property purchases.

The survey asked around 750 residential landlords and letting offices the following questions:

If houses prices were to fall, would you sell your residential property investments?

Do you expect/anticipate you'll acquire further BTL investment properties during the next 12 months?

The vast majority of BTL investors (88.9%) are confident they'll be able to ride out any downturn in the housing market, while a sizeable share (43.9%) plan to use falling prices as a buying opportunity, extending their property portfolios even further. ARLA says rental house prices fell by 1.3% in the last quarter of 2007, with the heaviest falls in the South East being partially offset by capital appreciation in central London.

Alive And Kicking

Further evidence that the BTL sector is still alive and kicking comes from specialist BTL mortgage lender, Paragon. It claims the total annual returns for investors in 2007 reached 21%, a 28-month high. The lender also claims rental income rose by 17% last year to a record £11,300 per annum, while yields remained steady at 6% for the twentieth month running.

If this data is accurate, returns from BTL would compare favourably with other types of investment. The FTSE All-Share Index rose just 7.4% in 2007 -- which takes account of both capital appreciation and dividend yield -- while market-leading savings accounts produced an even lower return of around 6% at best.

This all paints a rather rosy picture of the BTL sector for the coming year. But -- there's always a `but'! -- different reports suggest while experienced landlords appear to be coping well with changing market conditions, novice investors are starting to feel the pinch.

Alliance & Leicester has discovered that only 15% of residential landlords with a single property are able to save any proceeds from their investment and just 4% can live on the income generated.

Then again, on the other side of the coin, professional landlords with large property portfolios feel relatively financially secure, with almost half (49%) of those with at least 20 properties making sufficient profits to supplement their savings. What's more, a further 40% can rely on their portfolio for their main source of income.

So while BTL investors may not have enjoyed much in the way of capital appreciation on their latest acquisitions, clearly, experienced landlords are often in a much stronger position across their portfolio as a whole than those who have only just joined in.

An Uncertain Outlook

What's more, higher mortgage costs -- despite a recent cut to the base rate -- and an uncertain outlook for house prices are starting to get amateur investors' nerves jangling. Rental yields and property values may have performed well in 2007 and demand is expected to remain strong in 2008, but the shutters look like they're beginning to come down on the sector for first-time BTL investors.

For example, it's becoming more difficult for new investors to find affordable BTL mortgages. Following the credit crunch, lenders are demanding increasingly larger deposits as mortgage criteria tightens -deposits of 20% to 25% are now not uncommon. The BTL mortgage sector has been hit hard by the credit squeeze as Paragon and Alliance & Leicester - two big BTL lenders - are both reliant on wholesale money markets for their funding.

It seems to me the BTL boat may have already sailed for new investors. Of course, I may be wrong. If none of this puts you off and you still fancy taking your chances read my colleague, Donna Werbner's recent article Cut The Costs Of Buy-To-Let before you take the plunge.

More: If you want fee-free, whole-of-market mortgage advice, check out The Motley Fool's Mortgage Service.