In for the long-term

Recent research regarding the buy-to-let market in the UK has delivered a number of mixed messages about the current state of the sector and where it might be heading in the months and years ahead.

It is certainly fair to say that we are currently witnessing a fall-back from those heady months of yesteryear when it seemed that every man, woman and child thought they could make an easy buck out of property by becoming a landlord. I have never subscribed to the view that investing in buy-to-let is for everyone and we are now seeing large numbers of novice/amateur landlords experiencing difficulty because of the prevailing economic conditions and their own inexperience in the marketplace.

As a buy-to-let lender we have always been keen to stress the need to view this type of investment as one for the long-term. Indeed, having buy-to-let as a ‘hobby’ rather than as a major concern has been one reason why a number of ‘buy-to-letters’ are facing falls in the value of their properties coupled with difficulty in obtaining and holding on to tenants. Like any investment, buy-to-let comes with a range of inherent risks as well as rewards – given the ease that many lenders pre-Credit Crunch were handing out money to novice buy-to-let lenders we must wonder if the risks were ever truly considered by some.

Different environment

Now of course we have a much different lending and economic environment. Those landlords who were able to pick up cheap funding two years ago have found 2008 to be a very difficult time to refinance as prices have risen, criteria has been tightened significantly and a number of lenders (CHL included) have temporarily left the market.

Not only are there these obstacles to overcome but many novices will be looking at the type of property they purchased and wondering whether it was really a good buy. For instance, those who picked up one of large numbers of inner-city flats with the thought that house price rises would enable them to make a healthy return regardless of rental income, will not be sitting so pretty now. Maintaining occupancy and ensuring rental cover should be the ‘be all and end all’ for landlords – unfortunately this fact also got lost when some lenders decided not to include robust rental cover criteria in their products.


If the prognosis for buy-to-let doesn’t sound good then we should not forget that the buy-to-let sector remains a strong part of the overall mortgage market and property remains a solid long-term investment. However, there is clearly a difference between the speculative investor and the true professional buy-to-let investor. Effectively, the speculative investor could have invested in anything - be it wine, antiques, or any other asset - over the last five to ten years. The better short-term returns looked to be in property which is why we had the glut of speculators entering buy-to-let. However, as we have stated, the buy-to-let investment is one for the long-term based on delivering a regular income through occupancy and hopefully over time, capital growth with a rise in the property’s value.

The speculator is not willing to wait for the long-term – he or she wants immediate returns based on quick property price rises. In the UK the majority of speculators in buy-to-let have been amateur landlords with just one or two buy-to-let properties. It is these amateur speculators who are likely to be looking seriously at their ability to continue as buy-to-let investors. They now find themselves in the situation where they are losing money on the properties whilst having to fund larger mortgage costs and possibly not being able to find the tenants willing to pay the rent required to cover the mortgage simply because there is an over-supply of certain types of properties. It is a difficult situation to say the least.

With house prices on the slide we find ourselves in a unique situation for the buy-to-let sector. We should not forget that the market is relatively young and this will be the first time that it has had to face a significant period of declining property prices. We are awaiting the true effect of this fall back and it is interesting to speculate on what buy-to-let investors will do with their properties.

Again, some amateur landlords may make the decision to get out now although this will undoubtedly mean many will be selling at a loss. Other investors who have spent longer in the sector may also be looking to access the equity they have built up. Recently, Skandia suggested that large numbers of landlords will be driven out by the factors outlined above. It has estimated that investors will extract a minimum of £18 billion of equity from their buy-to-let portfolios if the buy-to-let mortgage pool contracts to £44 billion of outstanding loans – the current figure for outstanding buy-to-let loans is £132.5 billion (Source: CML) with Skandia predicting mean reversion by landlords in the region of £77 billion.

Solid shape

Overall, buy-to-let still looks in solid shape although figures released in August by the CML show that new buy-to-let lending declined in the first half of this year – there were 144,600 new loans, down from 176,500 in the second half of 2007. Having said this, the decline has not been as steep as in the wider market – buy-to-let decreased by 18% compared with 28% for house purchase and remortgage.

This seems to suggest that buy-to-let is holding up much better than the residential market in the face of the Credit Crunch and funding crisis. Buy-to-let loans also continue to rise – we are now well past the 1 million mark up to 1,103,000 in the UK worth a sizeable £132.5 billion. We are a long way from the £2 billion we witnessed back in 1998. Arrears too, whilst rising, are also lower than the wider market - 1.1% of buy-to-let loans are over three months in arrears compared with 1.33% for house purchase and remortgage.

There are a number of factors which seem to underpin the buy-to-let market and while in some areas of the country – notably city centres – there is a huge oversupply of certain types of properties, it is also true to say that rental demand is holding up in most other areas. While property prices have fallen back, over the last five or so years, their increase has still been substantial.

With wages not keeping pace this does mean that many potential first-time buyers are still unable to put a foot on the property ladder. The necessity to have somewhere to live means that the private rental sector is often the first port of call. Your Move recently announced that it had seen demand for rental accommodation rise by 76% year-on-year with lease commencements in July up 18% on June. Paragon Mortgages’ buy-to-let index for June showed rental yields still strong at 6.4% meaning those landlords able to access financing options and maintain tenant occupancy should continue to secure strong returns.


Many it would seem are also looking at the opportunities that falling house prices could bring – the Property Investor Show reported that 70% of landlords it polled were looking to expand their portfolios this year. This shows that there is an underlying confidence in buy-to-let but the professional landlord will also have a hard-nosed realism about the current economic situation and the need to ensure that any new properties bought will be able to ‘wash their face’.

Of course the landlord that we describe above is one of the ‘professionals’ – those who have a portfolio of properties which are treated as a business rather than a get rich quick scheme. Many of these landlords will have been through the ups and downs of the housing market before and will understand that a long-term strategy is necessary to see the true value of buy-to-let.

We, as a lender in this market, have always strived to ensure that our customers are more in this professional range. This meant keeping maximum LTVs at conservative levels and requesting rental cover of 115%-plus. Unfortunately, other lenders who entered the sector (and have since left) were somewhat more cavalier in their approach offering customers products with substantial LTVs while at the same time, in some cases, not requesting any rental cover stipulation in the criteria. Needless to say those days are well and truly over as the days of ‘easy’ securitisations render these lender models obsolete.

Instead there needs to be a new realism from lenders about who they lend to and rather importantly the borrower’s ability to keep up repayments. Remarkably, this key component of lending seemed to have been lost a couple of years back as the competitive bun-fight and need to grab volume at any cost raged on. Now, we are able to take a much more considered and realistic view of both the sector and prospective customers – indeed as arrears continue to rise the need to quality control new business will become ever more important.

Intermediaries too have their bit to play in this new realism – the products of yesteryear do not exist and the true value of the adviser will be in delivering a quality service and accessing the right finance to ensure their landlord clients continue to operate successfully within the sector. The impact of the Credit Crunch means that we as lenders should be much more realistic and measured about the way we lend and who we lend to.

Buy-to-let has grown rapidly in the last 10 years and it continues to offer strong investment potential. However, it is not a ‘fill your boots’ sector and it should certainly not be viewed as an area in which large returns can be gained quickly. Everyone in the mortgage market has a duty to establish these truths with our customers and in so doing we will be paving the way for continued buy-to-let strength and substance in the next ten years.