What the future holds for landlords

Christina Jordan takes a look at the latest figures and finds out what's going on in the private rented sector...

There's a lot of waffle spouted in the property and mortgage markets and it's often from those with a vested interest. Nothing wrong with a bit of spin, as long as we all understand where it's coming from.

But sometimes you really need to go back to the basics to get to the nitty gritty of a subject and I want to see what's really going on with landlords and the private rented sector. And this means trawling through the figures rather than relying on a press release -- gulp!

Poring through the latest quarterly indices from the Association of Residential Letting Agents (ARLA), Paragon Mortgages and the Council of Mortgage Lenders may not sound like an interesting way to spend a morning. But sometimes having a good look through the figures can illuminate a subject and cut through the waffle.

So what is really going on in the private rented sector and buy-to-let market?

Warning: here come the numbers!

Headline stats

One of Association of Residential Letting Agents' key indicators, average yields, was up in quarter two of this year compared to quarter one.

Returns on houses rose from 4.8% to 5.1% and flats from 4.9% to 5.0%.

According to buy-to-let lender Paragon Mortgages (whose own average yield figure is slightly higher at 6.4%), landlords in the Midlands achieved the strongest yield at 7.4%, followed by those in the North East (6.8%) and North West (6.7%).

Other areas included Wales (6.0%), Scotland (6.0%), the South West (5.9%) and the South East (5.8%)

The rental yield is the property's rental income as a percentage of its current capital value and therefore it's worth noting that the rise in yield has as much to do with falling capital values as it does strong rental income.

Indeed, most members of the Association of Residential Letting Agents recently reported decreased achievable rent levels on all types of rented property.

Capital values of rented houses dropped in quarter two by a significant 10.6%, but much of this came from large falls in London (12.2%) and the South East (11.3%).

In the rest of the UK values dropped by just 4.7%.

Values of flats also dropped but not to the same degree -- 3% in London and 3.6% in the rest of the UK.

Supply and demand

There has been much discussion about the increased demand in the rented sector from those who want to buy but can't get the finance, as well as increased supply from accidental landlords who cannot sell their home so rent it out instead.

But what do the numbers say?

According to the Association of Residential Letting Agents, the supply of rented residential properties is currently outstripping demand from tenants, and this is especially acute in central London.

Unsurprisingly then, void periods between tenancies increased slightly in quarter two to 30 days -- the highest level in five years.

Yet despite this, landlords are confident.

Bullish landlords

Almost a third of landlords believe demand from tenants will increase in the next year, while half of them reckon it will remain constant. Many landlords are prepared to put their money where their mouth is, with 16% of the Association of Residential Letting Agents members saying landlords in their area are still buying new properties -- a figure that has doubled in just three months!

And the vast majority of landlords don't even expect to sell any of their properties in the next year.

On average, landlords hold onto their 12.5 properties for 17 years (a figure that has risen slightly in the last few months), and over a quarter expect to keep them for over 20 years. This highlights that the majority of landlords really are in it for the long term, not to 'get rich quick' as so often assumed.

They are also borrowing at relatively modest loan-to-value ratios of 71% of a property's value. Of course this is impacted by current lender constraints on high loan-to-value lending. Across portfolios LTV ratios are even lower at an average of 57%, reflecting a sector with a large buffer against negative equity.

However.....

Buy-to-let mortgage arrears rose sharply in the first quarter of this year and, although they dropped back again by a significant 17% in quarter two, they still stand at 2.49% of all buy-to-let mortgages.

There is, of course, a direct link between these arrears and the fact that two-thirds of letting agents have seen an increase in the number of tenants struggling to meet their rental payments in the last six months.

The trouble with mortgages

Accessing affordable mortgage finance is still a problem for many landlords, with the majority of those who bought a property this year having used their own funds to do so. Around a third used mortgage finance. Many landlords said the lack of available mortgage finance was their main obstacle to expanding their portfolio in the current market.

Landlords want to buy and many are positive about the future of the market. But restrained mortgage lending continues to stifle the market and will do for the foreseeable future -- latest Council of Mortgage Lenders figures show buy-to-let lending continues to decline.

Since many specialist lenders rely on the wholesale markets, it could be some time yet before things improve for landlords on the mortgage front. Buy-to-let lenders are at the back of a long queue for mortgage funding.

Whatever your views on landlords or the buy-to-let market, a healthy private rented sector is essential to the overall health of the housing market. A contracting or stagnating private rented sector will simply push up rents for those who can least afford an increase.

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