In a report out from the Nationwide subsidiary, London and the South-East are highlighted as areas where there is considerable pressure on rental yields, as opposed to the North where prices are lower and yields higher.
Charles Reed, managing director of UCB Home Loans, says: The market is still very buoyant, as would be expected in a sector which is relatively young.
“However, we are seeing the first signs that enthusiasm is calming down a little in some areas, as rising interest rates and increased house prices begin to have a cooling effect.
“Rental returns of between 4% and 8% can be achieved in different parts of the country, but there is a gradual downward pressure on yields in some areas where the ratio of landlords to tenants is now becoming high.
“Parts of London, the South-East and the South, including the Home Counties, will still offer reasonable returns on carefully planned new purchases, but higher yields can generally be expected in more northern areas where prices are lower.”
Areas mentioned in the report in which buy-to-let purchases are popular include Sheffield, Leeds, Manchester, Liverpool, Blackpool, Newcastle, Hartlepool, Glasgow, the Mid-Ulster area and cities such as Birmingham, where inner-city apartments are being purchased.
University areas such as Exeter, Plymouth and Bristol remain popular, and towns such as Ashford in Kent are benefiting from the planned London rail link for the channel tunnel. Even parts of London, such as Bloomsbury, Fitzrovia and Wembley, offer some opportunities for landlords.
Reed adds: “With the market gradually beginning to soften in some areas, it is now more important than ever that investors take a long-term approach to making purchases of buy-to-let property.
“They need to undertake thorough research before making a decision and to take at least a 10-year outlook, rather than try to make a quick gain through capital appreciation alone. Links to areas of increasing employment, growth in student populations in university towns, and prospects for transport development are three of the key things they need to look at, and they should always take advice from local letting agents regarding the types of property that might be suitable for the rental market in different areas.”
Latest figures published by the Council of Mortgage Lenders show that buy-to-let lending continued to grow in the first half of 2004, but at a slower rate than last year. At the end of June there were 473,000 buy-to-let mortgages outstanding, worth £46.8bn, compared with 417,500, worth £39bn, at the end of 2003.
In the first half of this year, lenders advanced 119,800 buy-to-let mortgages, worth a total of £12bn. The number of loans was 6% higher than in the second half of last year, whilst their value was 3% higher. However, the rate of growth was much slower than in the preceding six months when the number and value of mortgages rose by over 50%.
Arrears on buy-to-let lending remain very low, with only one in 240 loans experiencing arrears of three months or more. This is around half the level of arrears in the mainstream home-owner mortgage sector.
Referring to the general rate of increase in house prices across the UK, Reed says: “The spring and early summer is often a good period for house sales and we have indeed seen quite large price increases in some parts of the country over the first part of this year.
“However, our research indicates that rising interest rates, coupled with a relatively high level of house prices by historical comparisons, are now beginning to lead to a cooling off in price rises.
“This is reflected in Nationwide's house price figures for August, which showed a monthly price rise of just 0.1%. This eased the annual figure down from 20.3% in the previous month to 18.9%, and this figure is expected to decline further to around 15% by the end of the year.
“As predicted, price growth has moderated rather than slumped, with prices rising by an average of 1% per month over the last quarter, compared with 1.7% per month over the previous three months.”
In some areas, the number of properties coming on to the market for sale remains low and stocks of unsold properties on the market have fallen to the lowest recorded level since 1979. This can have the effect of maintaining price levels, even where other factors might be expected to make prices stop rising.
On the subject of interest rates, Reed says that one more quarter point rise in the base rate was expected before the end of the year, taking the figure to 5% by the year-end.