Buy-to-let gets bad rep

Sally Laker, managing director, Mortgage Intelligence

Looking at some of the coverage in the national and trade press over recent weeks, it seems as though buy-to-let investments have become the popular whipping boy for those commenting on the housing and mortgage markets.

Ross Bowen, managing director of Connells Survey & Valuation, has been the latest to voice bad news for the rental sector, claiming that its share of the purchase market has fallen from 15% to 11% over the last year and that rental yields are not performing as well as other forms of investment.

The Council of Mortgage Lenders has released data for overall lending up to January 2008, the most recent buy-to-let figures, at the time of writing, are for the third quarter of 2007. These figures show that gross buy-to-let lending totalled £12.5bn during this period, accounting for 12.7% of total mortgage lending and down from 13.5% in the third quarter of 2006.

There may have been a dip in buy-to-let lending, but is it really as severe as Mr Bowen is suggesting? We will have to wait and see exactly how credit problems affect the amount lent to landlords and whether their appetite for further borrowing holds up, but there is every indication to say that it will.

Certainly the suggestion that rental yields are not performing as well as other forms of investment does not appear accurate when compared with equities. Looking at the FTSE 100 over the last year, it is down by over 7%, while the FTSE All Share index has done even worse and is down by over 8% for the year.

This is a far cry from the 6.2% yield that landlords were receiving for the year to December 2007, according to the Paragon Buy-to-Let Index. This figure was broadly in line with that from BM Solutions, which said landlords enjoyed yields of 5.4% over the year and both providers said yields had risen over the last 12 months.
Fears that rents have struggled to keep up with house price inflation are not therefore borne out by the figures and as prices cool over the course of the coming year, it is likely that yields will improve even further.
Such returns are certainly not to be sniffed at and while the structure of a buy-to-let investment may make it difficult to compare directly to others that are available, it seems there are very few offering this level of performance.

As with any investment, the key is in making sure it is geared at an appropriate level, the risk involved suits the investor’s appetite and it is well researched. Given the liquidity issues still present in the mortgage market and the more wary approach being taken by investors across the board, it is not surprising that buy-to-let volumes are slowing. However there are still excellent returns to be made and the fundamentals underpinning this performance remain solid for the future.