Landlords buy as demand from tenants grow

The typical landlord replying to the survey currently owns 13 properties, up from marginally over 11 properties last May.

Landlords buy at attractive prices to meet growing tenant demand

John Heron, managing director of Paragon Mortgages, explains: “The reticence of many potential owner occupiers to commit in the current market feeds through into stronger demand for rented accommodation. At the same time, in this quieter market environment, landlords have been able to negotiate particularly good deals on properties they are interested in purchasing as buy-to-let investments. The combination of these two factors means we’ve seen buoyant purchasing activity from them. It must be remembered that investors are dispassionate purchasers and will tend to negotiate hard on price. With this buying activity, the average size of landlords’ portfolios has grown by 15% in just 9 months.”

This quarter, landlords report a discernible growth in tenant demand. As in the previous two quarters, around two-thirds of them describe tenant demand as stable, but a significantly larger proportion (of almost 25%) say that demand is growing. This compares with just 19% last quarter and just under 21% two quarters ago. A very small but steady 1.5% of them describe tenant demand as booming.

“Although the experience of a majority of landlords is that demand is stable, almost one in four reports that is growing, up from one in five last quarter. Not surprisingly, this feeds through positively into investors’ own buy-to-let business activity. 23% of them say their business is on the increase, compared with 18% last quarter.” Over 70% of landlords say their buy-to-let business is stable.

Void periods decline again

The healthy state of the market in terms of tenant demand also translates into a sharp decline in void periods – the time during which a property remains empty between lettings.

“Between early 2002 and summer 2004, the general trend in voids was upward, but now we seem to have turned the corner,” continues John Heron. “Since last May, there have been three successive quarters of falling voids, from 3.0 weeks then to 2.65 weeks now. That’s the lowest level for over two years, and another indicator that demand for rented homes is strong relative to the available supply. It’s important for landlords to be able to let their properties quickly as and when they become vacant.”

Gearing levels stay low

Landlords continue to be cautious in terms of the level of borrowings they have relative to the value of their properties. As last quarter, almost two thirds (66%) have borrowings of less than half the value of their property portfolios, while more than a quarter (27%) have borrowings between half and three quarters of the value. A meagre 6% have borrowed more than three quarters, and none more than 90%.

John Heron continues: “Average gearing levels have fallen steadily over the past 3 years, from close to 50% in early 2002 to the current level which has stabilised at around 39%. This shows that as property values have risen over that time, investors have not increased their borrowings to the same extent. Caution remains the order of the day.”