Letting ideas flow

Buy-to-let is a bright spot in a troubled mortgage world but participants at Mortgage Strategy\'s recent Buy-to-let Summit were not content to rest on their laurels, suggesting various ways to move the sector forward, says Marcel Le Gouais

As Wall Street banks plunged into the turmoil engulfing the US economy, leaving several UK lenders braced for the inevitable fallout, some overdue good news was provided by Mortgage Strategy’s Buy-to-let Summit on March 13 and 14.

While the future for many sectors of the market looks increasingly hazardous, the summit offered comfort to lenders, brokers, solicitors and letting ag- ents operating in buy-to-let.

Delegates at the Four Seasons Hotel in Fleet, Hampshire heard what they had known for some time – that the buy-to-let sector’s strength is underpinned by an array of economic and social trends. But perhaps more important was major participants’ willingness to do better.

Since the summit, the strategies of lenders have continued to fluctuate and buy-to-let has not been immune from the changes. For example, last Tuesday Mortgages PLC revealed that it would withdraw from prime buy-to-let.

And not everyone predicts plain sailing for the sector. During last week’s Great Housing Market Debate hosted by The Wriglesworth Consultancy, experts and economists were conservative about its prospects.

In the debate, Michael Coogan, di-rector-general of the Council of Mortgage Lenders, said buy-to-let had defied logic in Q1 2008 by growing and that words such as boom and bust were too simplistic to describe the market.

In the same session, Evan Davis, the BBC’s economics editor, said a buy-to-let boom was highly unlikely.

Davis says the economy has reached a turning point. He claims the Polish immigrants who have helped to boost rental demand in the UK are being enticed back home as the zloty gains strength against the pound and wages in Poland increase.

At the Buy-to-let Summit, subjects covered included the sector’s prospects, calls for transparency in the valuation of new-build developments, a move towards self-regulation in the sale-and-rent-back sector and the possible re-turn of investors to the securitisation market. Each topic was covered in a series of candid discussions.

It all began with an economics ex-pert’s forecast of 3% growth in buy-to-let tenancies in the next decade.

Michael Ball, professor of urban and property economics at Reading University, revealed a raft of statistics that demonstrated the underlying strength of the sector.

His presentation highlighted growing affordability problems, rising rental income, housing supply shortages and immigration as factors that will push up rental demand.

“The long-term prospects for the buy-to-let sector are good,” says Ball. “Investors are in a strong position and rental demand tends to do well during housing market slowdowns. There are no signs of the much vaunted meltdown of buy-to-let.”

Ball presented an array of government statistics that predict affordability problems will soar.

Referring to figures from the Na-tional Housing and Planning Advice Unit, Ball says that only 52% of people aged between 30 and 34 living in London can afford to buy property in the capital.

The NHPAU forecasts that this number will fall to 44% by 2018 and 34% by 2026.

Its figures also show that in the North-West, only 56% of individuals aged between 30 and 34 can afford to buy local property. The unit predicts that this figure will fall to 47% by 2016 and 35% by 2026.

“Affordability is a growing problem,” says Ball. “In the longer term, higher prices will push individuals into renting.”

He predicts that big investors will move into the sector but that theywon’t form the core of the market.

And in an important message to landlords, he warns that tenants will start demanding better service.

“To ensure a successful future, in-vestors will have to focus more on consumers,” he says.

House builders face a bleak future. Ball predicts a fall in construction of be-tween 15% and 20% in the next two years and a drop in house prices of as much as 10% over the same period.

But he believes the mortgage market will enjoy a strong revival in one or two years’ time.

Ball’s presentation ended on this high note but a more reflective debate followed in the panel session chaired by John Heron, director of mortgages at Paragon Mortgages. This moved on to the role of letting agents and their relationship with landlords. “Many landlords have to use agents and have good working relationships with them,” says Ian Potter, operations manager at the Association of Residential Lettings Agents.

“But there are rogue agents, so the question becomes – how do you spot a rogue? My advice is to ensure agents are members of a professional body.”

Potter highlights the types of rental demand to which landlords should switch their focus.

“One of the big problems buy-to-let has had is landlords buying properties the market does not want,” he says. “At the moment, the market for one and two-bedroom flats is saturated.”

“Many portfolio landlords ask agencies to find tenants for them and that is a useful service,” says David Salusbury, chairman of the National Landlords Association.

“If you want to be a practitioner in this business, you need to get some experience.”

The panel was also asked if the industry had seen the last of the breed of new landlords who were encouraged to join in by rising property prices.

“If their motivation is to get rich quick, I’d strongly suggest that potential landlords should consider their position,” says Paul Field, divisional director of residential lending at West Bromwich. “If they’re in it for the long-term it’s a secure investment, but we are not seeing many new landlords coming into the market.”

Salusbury says there are some 800,000 landlords of varying types in the UK.

“Our advice to new landlords is do your research and then do your own thing. Being a successful landlord is personality-driven. It’s not something that lends itself to a formula.”

The question of whether landlords should be licensed was also posed during the session. Private landlords are not subject to licensing unless they own houses in multiple occupation.

“There’s no doubt that opinion is coming around to the view that some form of registration or licensing is due,” says Field. “The idea is gaining ground, particularly in government circles.

“But we would advise the government to move carefully on this subject. In Scotland a scheme of this type is failing. At the bottom end of the Scottish market, many private landlords are struggling”The time for self-regulation has arrived,” he adds. “We need a simple form of registration for investors who wish to offer residential property for rent on the open market. Tenancy de-posit protection is already a form of self-regulation.”

Salusbury claims this theme could be developed to help landlords and tenants.

“Together, we can find a way to make life easier for landlords rather than forcing them to be licensed,” he says.

New-build properties and developers – often the subjects of derision in the housing industry – were the next issues into which the panel sunk its teeth.

Unsurprisingly, the quality of new-build properties and the oversupply of one and two-bedroom flats came in for a hammering.

Heron, who believes speculative investment in new-build flats has de-stroyed the housing market in some city centres, highlighted problems in the sector. He was not alone.

“We have issues with new-build flats, particularly in city centres,” says Field. “As a consequence, we have capped our maximum LTV on new-builds at 75%.”

Since the summit, Abbey has also slashed the maximum LTV on its new-build buy-to-let deals from 85% to 65%.

At the summit, Gus Park, director of intermediary lending at Mortgage Ex-press, said developers have not always been transparent about the nature of new-build transactions.

“Neither landlords nor buyers have been able to have confidence in what the value of these properties is,” he says. “We need transparency with all transactions.”

“Have lenders been naive in their approach to new-builds?” asks Paul Rockett, managing director of The Business Mortgage Company.

“I think they have. If you look at the new-builds of three years ago, they were accidents waiting to happen. Buying off-plan is being spoken of as a new phenomenon but people have been doing it for years.”

“What’s needed now is some joined-up thinking between planning and housing departments about what housing stock is required,” says Potter.

“There are too many two-bedroom flats so we are getting the wrong housing mix. We need more one, two and three-bedroom houses mixed in with each development or we will see areas dominated by one-bedroom flats be-coming ghettos in 20 years’ time.”

“Sometimes you can see greed at work when it comes to new-build properties,” says Salusbury. “Investors be-lieve there’s a route to riches via pro- perty investment but landlords should remember they are dealing with tenants’ lives.

“What went wrong? Judgements went wrong, investments went wrong and now buyers are paying the price. I hope the industry can sustain this dent to its reputation.”

Continuing its focus on contentious issues, the Buy-to-let Summit also covered the future of sale-and-rent-back schemes.

“If it’s done right, there is a place for sale-and-rent back,” says Park. “It may be the best option in the absence of a sub-prime market. The challenge we all face is to distinguish good providers from bad. It’s important that consumers get legal advice and the whole process is transparent.”

“Abuses do not only centre on knock-down prices, there are also problems with security of tenure,” says Salusbury.

“Once a seller has entered into an agreement with a buyer, the new owner can evict the tenant after their initial fixed term of occupancy. That is a serious abuse.”

He says the NLA is in talks with the Treasury and several sale-and-rent-back providers in a bid to launch a potential government-backed code of conduct in the sector.

“We might go further,” he adds. “We might set up some sort of trade body. There is an urgent need for regulation of some description, so much so that we need to do it ourselves.

“We’re prepared to act before Whitehall feels compelled to, especially as it would probably get it wrong.”

As the session ended, the panel was asked what brokers should do to succeed in the buy-to-let sector.

Landlords were encouraged to be-come members of bodies such as the NLA and to develop links with organisations including ARLA.

“There are amateur landlords and there are professionals,” says Field. “And brokers must meet the needs of both groups.”

“Offering tax advice is something brokers could do to improve their service,” says Potter.

Salusbury says the biggest problems for landlords are not brokers but government regulation and unreliable tenants.

The idea of producing a guide for prospective buy-to-let investors was also mooted.

On day two of the summit, insights were provided into the investors who have disappeared from the securitisation markets.

Independent consultant Steven Khan pointed out that a recent JP Morgan survey showed investors had not lost all confidence in mortgage-backed investments.

The survey shows 75% of investors still believe securitisation has a role to play in funding consumer lending.

More than 170 global investors were asked if they are likely to return to the market, along with their views on European residential mortgage-backed securities.

The survey provides a valuable insight into the attitudes of investors who have previously invested in RMBS deals from specialist lenders such as GMAC-RFC and Platform.

“Most of the investors think securitisation still works,” says Khan, former head of residential trading at Morgan Stanley. “They have not given up on it.”

He believes they will return to the market towards the end of this year.

“It will only take one investor to break the mould,” he adds.

Khan says investors were driven away because of plunging confidence in mortgage-backed bond ratings.

His summit presentation revealed a sharp decline in securitisation this year. While deals increased from £74bn in 1999 to £524bn in 2007, there have been just £20bn worth so far in 2008.

The news that investors have not disappeared forever was one of several indicators that the market will pick up at some point next year.

In the meantime, self-regulation and joined-up thinking might strengthen the buy-to-let sector.