Buoyant phase expected for buy-to-let portfolios

Landlords expect the net value of their investment portfolios to grow by 5% over the next 12 month, reveals the latest research from Paragon Mortgages.

This is the highest growth expected for more than a year and reflects a significant upswing in sentiment since the beginning of 2005.

Last year, the survey indicated that landlords were relatively more cautious in terms of the growth they expected in the value of their portfolios. By the end of 2004, landlords were forecasting the size of their portfolios to be virtually flat over the coming year.

John Heron, managing director of Paragon, says: “Were clearly now in a more buoyant phase for landlords. The market has proved more resilient than many people expected, and were definitely seeing a bounce back in buy-to-let.

“This is to a significant extent a result of lower financing costs following the interest rate reductions, with investors able to borrow at very competitive prices, either on a fixed or variable rate basis. This has fed through into the recent resurgence of activity.

“In numerical terms, property investors expect to grow the size of their portfolios by 3.4% from the current 11.8 to an average of 12.2 properties.”

With the average value of landlords property portfolios currently standing at 1.45m, they are forecast to increase by 72,500 over the next year to reach a value of 1.52m.

Looking at current portfolio sizes, more than six out of ten respondents (62%) own properties currently worth more than 0.5m. In fact, over a quarter (26%) have portfolios worth more than 1m and a significant minority (13%) over 3m.

Heron says: “Our figures reflect the importance of larger scale property investors in the market. The bulk of the rented housing stock is controlled by landlords who own a large number of properties.

“Based on ODPM statistics, almost three-quarters of the rented housing stock is owned by just 13% of landlords. Indeed, each of these 13% of landlords owns more than 100 properties, and over half of them own in excess of 250.”

The renewed buoyancy of the private rented sector reflects in particular positive trends in tenant demand. Asked about their perception of how tenant demand is changing, more than three times as many landlords reported that it is expanding than said it is declining.

Heron adds: “Two-thirds of landlords say that demand is stable, but an important 21% report that it is growing, while a small 2% say its booming. This growth is reflected in an increase in the number of households, driven by inward migration, a burgeoning student population, growth in the number of people who live on their own, among other factors.”

The growth in demand is having a knock-on effect on rents. 38% of landlords say that rents have increased over the past six months, while just under half report that they are stable.

Heron says: “Hand in hand with growth in tenant demand, rents are on the up, according to many landlords. While just under half describe rents as stable, 38% report that they have firmed over the past six months. That is borne out by data from our own buy-to-let index, which sees rents up about 10% in the past 12 months.”

Yields are expected to remain fairly stable over the next 12 months. On a gross basis, landlords forecast a yield of 6.4% in a years time, or 4.7% on a net basis after running costs. These figures are little changed from the current levels of 6.5% gross and 4.8% net.

Heron says: “With good demand from tenants, interest rates that are low and expected to remain low, and a property market that has seen a soft landing, landlords have good reason to feel more positive now than they have for a year or so. Our research suggests that their confidence in the future of buy-to-let in this country will translate into sustained growth in their portfolios.”