End of Buy to Let

Judith Heywood

Buy-to-let investors were not meant to survive this downturn. With the cost associated with borrowing up — if available at all — and income from rents down, aspiring investors who piled up the debts to plough into the rental market were expected to be among early casualties. But the predicted sell-off has not occurred. True, auction houses are disposing of new-build units at startling discounts, but this sector was always a small one. As our survey of investors suggests, many are unexpectedly sanguine: low interest rates, which have been held at 0.5 per cent for five months, are helping them to balance their books, even as rents subside and voids and arrears increase. And for the cash-rich it remains an excellent time to buy.

Not-so-brisk trade

Marcus Jays owns 143 properties in areas of London, such as Highgate, Walthamstow, Leytonstone, Forest Gate and Dagenham, through his company Questor Properties. This year the buy-to-let investor and property trader has bought — and sold — 30 homes, but this is only half of what he would have been turning over 18 months ago. “The market is very enjoyable now. When it was doing well, I was under pressure to buy homes, do them up and then sell them on for money for the next deal. Now I am making a nice living from the rents.”

With such a large portfolio, Jays has a good deal with his bank — a corporate lender — but he is aware that when his arrangement ends in 18 months he may be forced to accept less favourable terms. But, for now, his tracker borrowings and related costs add up to an interest rate of just 3 per cent. Such low costs make up for a cut in the rent that he can charge on larger, more expensive homes. He now earns £1,400 a month, rather than £1,700, from a property in Balham, South London; his smaller “bread-and-butter” flats (many ex-housing association, picked up at auction) are as in demand as ever.

Costs rising

Laurent Ezekiel, an advertising executive turned owner of 13 buy-to-let homes in East and North London, is watching interest rates carefully. He has held his position, neither selling nor buying, and believes that while interest rates stay low he can carry on. “I think that rates will rise much faster than rents. If they shoot up, I may have to sell several properties.”

Ezekiel — who featured in Bricks and Mortar in 2003 and in 2007 — says that rents are as much as 15 per cent lower than at the peak, driven down by assertive tenants in over-supplied areas. “You get them on the phone, saying a flat in the same building is on the market for 10 per cent less. You can’t say no and lose them.”

Ezekiel has been able to accommodate the fall in income because the cost of borrowing has declined, thanks to his tracker deals. “It is actually easier now because you don’t have to remortgage all the time. Even if your deal expires, you just go on to the standard variable rate, which is usually quite low.” If he could stockpile cash for more investments, he says he would buy homes in West Hampstead, northwest London, where he lives, rather than near the City, where he invests. “Prices in more residential areas have gone down, but they are also likely to go up more quickly.”

Saving up cash

As an analyst who worked in the credit industry, Shona Davison, pictured, suspected that the borrowing-fuelled housing bubble would not last. But Davison, 31, bought her first buy-to-flat at 24, when she realised after much househunting that she could not afford to buy in Wokingham, Berkshire, where she lived. Davison — on maternity leave after the birth of her son, Dexter, four months ago — purchased a flat in Sheffield, which she later sold to fund the purchase of two houses, since converted to flats. Last month she was announced as the national winner in the National Landlords Association Women in Property awards.

She believes it would be a good time to buy, but has relied in the past on remortgaging to release cash for deposits. But she is benefiting from the breathing space produced by her tracker mortgages. Her deals are interest-only, so she is able to save £2,000 a month profit on the rent she earns, with a view to using it for future investments. “I have always believed in interest-only deals, because of the tax relief. Due to the current mortgage situation, it would be daft to pay off more of the loan.”

Pared-down portfolio

Zahid Chaudri specialises in buying rundown family homes in the North London suburbs of Golders Green and Arnos Grove, converting them to apartments and renting them out. Five years into his buy-to-let career, the 28-year-old father-of-two owns 14 properties. But, reluctantly, he is close to selling two apartments, which he converted from a derelict house, bought for £465,000 last November. Each will bring in about £300,000, which — after costs of £80,000 — he says will give him little profit. “I am using bridging finance and it is difficult to refinance at the moment. Everywhere I have turned is a dead end.”

Chaudri believes it counts against him that he has so many outstanding mortgages, with a typical loan-to-value ratio of 85-90 per cent. But, apart from these two sales, he sees no reason further to reduce his portfolio while interest rates remain so low, even though the most attractive rates on most of his deals have expired and reverted to standard variable rate. Buying is out, while lenders are so strict on loan-to-value ratios: “If averages LTVs went back to 85 or 90 per cent LTV, it would be a good time to buy.”

The canny are cashing in

It is a nightmare for buy-to-let investors; institutions have been circling the rental market for years, and now they are poised to strike. Aviva, the financial services giant, last week revealed advanced plans to build homes to rent en masse. The prospect of powerful rivals for tenants is one worry for small-scale investors; others are piling up: arrears and voids (periods between a property being let) are up, rents are down.

In this market, many investors have found their ambitions curbed. Brian Murphy, head of funding at the Mortgage Advice Bureau, a broker, says: “The amateur landlords who fuelled the buy-to-let boom have all but disappeared.” And even those with substantial portfolios — who at first were unaffected by more stringent lending rules — are finding that banks and building societies are reluctant to lend to investors with too many commitments.

Yet the air of landlords is one of optimism. Some are celebrating what they believe are signs that the “reluctant landlord” is in retreat. These are homeowners who, unable or unwilling to sell their homes at deflated prices, have opted to rent them out instead. The website FindaProperty.com reports that this trend contributed to a 119 per cent increase in rental properties listed on its site in the year to May. Since then the supply has fallen — but by a mere 2 per cent.

Alas, accidental landlords are likely to remain a feature of the market while good-value mortgages are difficult to obtain. Experts say many householders — like investors — are clinging to the relative attractiveness of lenders’ standard variable rate compared with what they would secure if they looked for a new deal.

But there are hints of better times ahead for investors. Jeremy Leaf, a Royal Institution of Chartered Surveyors spokesman, says that he is noticing more buy-to-let investors disposing of homes in the revived property market, but only to their own advantage. “They are being much more discriminating. If they have a donkey of a property, they are offloading it.” And the latest report from Arla, the Association of Residential Letting Agents, says that twice as many landlords — 16 per cent — report that they are buying more properties than three months ago.

Gary Murphy, the auctioneer at Allsop, agrees: “It is a buyers’ market and those investors with cash are taking advantage of it.”