Latest in Lettings Issue 5
THE EFFECT ON LANDLORDS AND AGENTS OF THE TURBULENCE IN FINANCIAL MARKETS
RENTS ARE RISING
as first time buyers hold off there is an increase in demand for rented property month on month. Almost all rental agents report a shortage of stock. Existing tenants stay on, asking for lease extensions and new instructions are rarely vacant for long. Many owners who sell also often delay the next purchase while renting to negotiate hard for a bargain or choosing to wait for the sales market to settle down.
All good news for landlords and tenants already in the market, although poor quality properties, those in areas of high unemployment or in depressed areas will attract only those on low incomes or the unemployed with consequent rent collection and property management problems.
New B2L landlords will find it more difficult to get into the market. Mainstream lenders, the big high street banks, and major building societies are tightening credit controls and now look for higher deposits and proof of other income that will assist if rental income fails through voids or tenants who cease to pay. Rental warranty underwriters are doing good business as a result, with many agents reporting that 65-70% of their landlords insist on rental guarantee insurance.
THE TURBULENCE AND IT'S EFFECTS
Will not go away for two years or more. Fringe lenders will not all survive because banks many not be willing to fund operators who borrow short and lend long. Victoria Mortgages has already gone, Kensington is cautious and raising mortgage interest rates since money costs it more. Paragon was reported in the financial press as having funds until 2008 and must therefore be careful.
THE 'FLIP' MARKET
has virtually disappeared since buying off plan at a discount in the hope of selling before or soon after completion has become a dangerous game to play for all but the larger specialists who can afford to hold, let and sell on as investment packages.
THE SALES MARKET
cannot be forecast in the short or medium term, although the force of demand and the inexorable rise in building costs gives some assurance for longer, say 7 to 10 year time spans. The contagion will spread, the temptation to invest overseas should almost always be resisted. Spain is the most vivid example with large stocks of unsold new builds, resales extremely difficult and developers filing for bankruptcy. Buy a home abroad to enjoy as a holiday home by all means if you can afford it, and regard any rental income as icing on the cake. But if investment decisions are difficult in the UK, are they really any easier or likely to be rewarding in eastern Europe or even further afield?
IT MAKES SENSE TO LOOK AT COSTS AND VALUES
Agents will be wise to look again at business expenses. Fee cutting, already endemic, is a recipe for disaster, when profit disappears so does the value of a business. Even the most active acquisitors will not buy a company whose fees barely cover costs. Time to review the portfolio and resign the instructions of those landlords whose properties take up too much management time or cannot be let readily because of distance, condition or the demand for an unrealistic rent.
LANDLORDS SHOULD DO THE SAME
Get rid of the dogs, those with high ground rent and maintenance charges, those that cannot be brought up to standard without unreasonable expenditure, or where the outstanding mortgage is too great to be comfortable.
TAKE COMFORT
"Sectors based on long term trends could withstand a downturn". (Financial Times 24.09.07). Students have to live somewhere. The demographic trends, longer lives, more single person households, immigration, and the tendency to delay home making until the early thirties are all playing their part. The rental market will almost certainly grow faster in the next ten years than at any time since 1988.
SAVE YOUR TEARS
You do not need to weep for the London market, where price reductions of £500-£750,000 are necessary, gazumping a thing of the past, and mega mortgages almost impossible to obtain.
The developers may not justify your compassion either. Their shares are marked down as the sales of new homes falter and profit warnings become the order of the day.
No sympathy either for the government - the new homes forecast is most unlikely to be met because developers will not build if they cannot sell to cautious buyers.
Local authorities and Housing Associations will not be able to deal with the shortfall by building homes to let or for sale on shared equity plans in excess of those already proposed - they just do not have the funds or even excess borrowing capacity with which to do so.