Coming Problems in the Buy to Let Market?

As a new non executive director joining Caduceus’s board my job is to find property portfolios that meet the company’s criteria. All new property purchased must have a good rental level and have some potential for capital growth over the long term.

Mark and I have been meeting vendors and agents in Fife, Dundee and Glasgow recently and have also been having discussions with corporate lawyers.

We have made offers for two separate portfolios within the last month
Involving 36 flats and are in discussions to buy two further portfolios. The first of these involves 57 flats and the second between 200 – 400 apartments.

There have been many articles on the ‘Buy to Let’ business in the quality daily news papers recently. In fact The Times and The Telegraph have published reports on a weekly basis over the last two to three months

Figures from the Council of Mortgage Lenders CML confirm that property remains hugely popular as an investment class despite sky-high property prices and rising interest rates. The CML states that 440.000 buy-to-let mortgages with a total value of more than £38bn were taken out last year and increase of 57% from 2005.

Landlord Mortgages,- buy to let broker -, states that rental yields hit a five year low in 2006 – averaging 5.74%. Some yields are as low as 2% and London yields are about 4%.

Landlords therefore in many cases are gambling on capital growth as clearly such low yielding investments are running at a loss when BTL mortgage rates are factored in to a Profit & Loss account. One well known London agent – Mark Dampier of Hargreaves Lansdown- is quoted as saying : “ The yield situation now looks completely nuts. If you are getting a yield of just 4% you have no safety net and if you have a mortgage you are actually losing money’ Property prices do go down as well as up.”

However Nigel Terrington CEO of Paragon Group – the largest lender to professional BTL landlords points out ‘that rising immigration, growing household numbers, the expanding student population, and the increasing tendency of young people to defer their first home purchase, all mean there is a need for greater flexibility in our housing stock, and the private rented sector is ideally suited to that need’.

The most important aspects of the Rental business in these increasingly competitive times as The Bank of England raises key interest rates. are for Landlords to ensure their properties are let out full time and that they are continuing to achieve yields above their agreed lending rates. Fairly obvious stuff but many landlords are relying heavily on capital gains to achieve a profit and are in grave danger of losing out on their investments should the market stagnate or values fall.

There are many new landlords who have never experienced a falling market such as the collapse that occurred in the early 90’s and in the mid 1970’s. Once a slide kicks in there is a herd mentality that drives prices lower and lower. You can witness this effect in the USA right now.


Ken Taylor.
12th March 2007
An abbreviated version of this was published at www.diary.twotalk.net