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Wealthy invest with long-term vision

Tuesday 8th January 2013

It is unsurprising to learn that over half of all existing landlords are planning to expand their portfolio within the next six months, given some of the potentially lucrative long-term returns available throughout the UK.

According to research released by specialist mortgage broker Mortgages for Business, the buy-to-let market looks set to expand further in the first half of 2013, with 55% of landlords planning to increase their property portfolios during the first half of 2013.   

The research, which polled 218 investors, suggested landlord appetite for more purchases stems from the attractive yields available on vanilla (residential) investments. High gross yields on residential property – which currently stand at 6.7% – are encouraging landlords to expand their portfolios even further. Of those investors who intend to expand their portfolios this year, almost nine in ten (88%) plan on buying more residential property.

Investment in complex property was less popular, although more landlords plan to purchase Houses in Multiple Occupation (26%) and Multi-Unit Freehold Blocks (16%). Less investors plan to buy semi-commercial property (11%) and commercial property (7%).

Encouragingly, just 6% of landlords say they are planning to trim their portfolios over the next six months, the same proportion as six months ago.

Two-thirds of landlords planning to purchase more property say they will need to refinance in order to do so. In total, 43% of landlords say they will look to remortgage in the first half of 2013, up from 36% from six months ago, suggesting high yields – particularly on residential property – are encouraging more landlords to refinance. And even though 45% of landlords don’t envisage growing their portfolio in the first half of 2013, a quarter of them still plan to remortgage.

David Whittaker, managing director at Mortgages for Business, said: “Tenant demand for residential property is ballooning thanks to the lack of mortgages available to first-time buyers. Every month more and more would-be buyers are being forced to rent, and this is pushing up demand to astronomical levels, producing very attractive gross yields for landlords as a result. Not surprising, then, that well over half of investors want to expand their portfolios to take advantage of these high yields. The first half of 2013 will see a spate of purchasing and remortgaging as landlords try to put themselves in a position to take full advantage of a buy to let sector which is in very good health.”

David Brown, commercial director of LSL Property Services, concurred: “More investment in the private rented sector is needed. Thankfully strong tenant demand and yields are tempting more people to invest in the sector and existing landlords to expand their portfolios. But investors should place financial suitability of any prospective tenant high up their agenda when letting a property. Cutting corners at the point of vetting a tenant is a false economy, and can prove costly. It is far easier to take action to prevent arrears in the first place, than to resolve them after they have occurred.”

The research also found, perhaps surprisingly, that four in ten (39%) investors rely entirely on rental income, which illustrates just why it is that an investor must get it right when investing in property.

Long-term view

Most experts agree that an investment in property should be made with a long-term perspective - at least five years. A property investment requires a large amount of money and the transaction costs related to its sale is also quite significant.

Therefore, those looking at investing in property should plan with a long-term horizon.

Property millionaires

There was an astonishing 19% increase in the number of UK property millionaires in 2012, on the back of strong demand for residential properties in the country, according to Zoopla.

Figures published by the property portal reveal that 47,024 more British property millionaires were created over the past 12 months. There are now 300,142 property millionaires in Britain.

High-end properties

The increase in property prices at the top-end of the market during 2012 was notably sharper than the rest of the property market where house prices grew by just 1% overall. Property price growth in London and the South East, fuelled by demand from equity-rich buyers and limited supply, helped push the value of a further 47,024 UK properties over £1 million during 2012.

London

Almost two-thirds (64 per cent) of Britain’s property millionaires live in London. The capital is home to 182,583 property millionaires, with 36,815 more created in the last 12 months, equivalent to 100 new property millionaires being created every day in the capital throughout 2012.

Kensington in west London is home to the most property millionaires in Britain with an average property value currently of £2,186,471 and where a staggering 64 per cent of all homes are currently worth over £1 million.

Lawrence Hall of Zoopla.co.uk said: “The top end of the property market operates seemingly in isolation to the rest of the market. Wealthier buyers are relatively impervious to the economic problems affecting the rest of the market, most notably when it comes to getting a mortgage. Foreign buyers in particular have gravitated towards top-end property in London over the last few years, which has pushed up demand and prices on more expensive property as they try to secure a limited supply of top-end homes in the capital.”

Expert comments

Trevor Abrahmsohn of Glentree International said: “What has been shown over time is that investment in residential property over the past thirty years yielded approximately 8-10% consistently. Yes, even residential property is affected by recession, but usually the correction is no more than 25% and this recovers within a year to 18months.

“Since the most usual investment for pension,s apart from bonds, is in equities and thanks to our innumerate former chancellor Mr Brown, who robbed the institutions of their tax credits, slavish investments in equities in the UK have been somewhat dull over time. More and more people are waking up and ‘smelling the roses’ by buying buy to let properties as an alternative to pensions. They may not be as tax efficient but they are more flexible and invariably offer greater consistent returns when you add the capital appreciation with the income. They are not subject to pension laws and therefore there is a lot more flexibility associated with them.

“People now consider their own primary residence to be not only a sanctuary for the family but also a form of pension where the gains are tax free. Often consumers sell off properties when they reach middle age and buy smaller cheaper properties in order to extract the spare tax free cash. This is win, win since they have been living in the luxury of their investments, providing a roof over their heads and assist with their retirement plans – what a result!”

Graham Lock, director & co founder of HouseNetwork.co.uk, commented: “I think property still offers great return on your money, whilst the bank savings rates are as low as they are then people will continue to invest in property that offers a much greater return and with demand for rentals high it does provide a lot of comfort for investors.”

Simon Bradbury, managing partner of Fine & Country in Cambridgeshire, remarked: “No investment is ever as safe as houses. I’ve long thought that people should cease to see their residence as an investment and treat it as a home - a lot of the so-called property millionaires were generated in the London area, a location still heavily influenced by overseas buyers. My advice is to simply buy a home that you can afford and expect that, over the long term, it will probably show a fair return- but don’t rely on it. Don’t buy your main home as an investment.”

Claudia Stacey-Ralda, senior buying agent at Prospect Property Search, said: “Investing in property at the moment seems to be giving a greater return than leaving disposable savings idle in a bank. Certainly from an international perspective the legalities of buying in London make it a safe purchase and many people view London property in particular as a safe-haven for their cash. Even if these purchases are then left empty or rented out. The new Funding for Lending scheme also helps access to lending somewhat easier than it has been.”

              

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