The typical landlord expects to grow his or her portfolio of rental properties by 6% over the next 12 months, according to Paragon Mortgages' landlord survey for the third quarter of 2004. This figure, which is the same as that reported last quarter, suggests that landlords are forecasting steady, rather than explosive growth. A year ago, their growth forecast was 8.2%.
The investors responding to Paragon Mortgages' survey now have an average of 11.6 properties, 5.5% more than a year ago and 2.7% more than last quarter.
John Heron, managing director of Paragon Mortgages, says: “The housing market has been pretty busy over the last year, and that includes buy-to-let. It's not surprising that buy-to-let activity has cooled off a little in response to the five interest rate rises that we have seen since last November. In 2003, landlords told us they were expecting to grow the number of properties in their portfolios by between 8% and 10%. This year, they have trimmed their expectations to 6% – but that's still steady growth by anyone's standards.”
Landlords' sustained confidence in the future is underpinned by their perception that tenant demand will remain solid. Nine out of ten landlords believe tenant demand is either stable or growing, with only 9% saying that demand is falling. Last quarter, opinions regarding tenant demand were slightly less positive, with 15% of landlords saying that tenant demand was falling, and 81% saying it was stable or growing.
Heron says: “The proportion of landlords saying that tenant demand is falling has gone down significantly, from 15% to 9%. What we're seeing is a steady, stable market for rented properties, more than two-thirds of landlords describe tenant demand as stable, up from 55%
last quarter. Many people either need to find rented homes because they can't afford to buy, or choose rented homes because it suits their lifestyles. This means that over the long term there is sustained demand for buy-to-let properties. The sector is neither growing rapidly, nor
declining. Just 1.5% of landlords reported that demand was booming (down from 3%), and only 0.5% said it was slumping, down from 1.4%.”
Landlords expect the net value of their portfolios to increase by 3.2% over the next 12 months.
For the third quarter in a row, landlords have reduced the average gearing of their investment portfolios, the proportion of borrowings relative to value. Gearing now stands at 38%, down from 43% in the Q4 2003 survey. While there was a slight rise in gearing in the Autumn last year, the trend is now clearly downward. In fact, it has fallen significantly in just over two years, from 48% in Q2 2002 to the current level of 38%.
Heron says: “This drop in gearing is positive, showing that investor landlords are adopting a very prudent approach to the level of their borrowings. While there was a slight rise in late 2003, gearing levels are now declining steadily.
Some 68% of landlords have borrowings of less than half the value of their portfolios, slightly down on last quarter, and 31% have borrowings of less than a quarter. Only 5% have borrowings of more than three quarters of the value of their portfolios, and none exceeds 90%. This illustrates that buy-to-let investors are financially in a much more comfortable position than the average owner-occupier, and better placed to cope with the rising interest rates we have been experiencing over the past 10 months.”