The UK property market is likely to see a positive buy to let sector in 2011 as landlords and investors build on a solid 2010, it is claimed.
A strong level of tenant demand is likely to continue but it will be some time before this sector returns to what many would call ‘normal’ in terms of lending, according to Nigel Terrington, chief executive of buy to let mortgage specialist Paragon Group.
‘2010 has provided a solid base for the buy to let market on which to build over the next 12 months. Both the number of lenders and products has increased and gross advances are expected to be up at least 10% on 2009 numbers. I expect that positive sentiment to continue into the New Year,’ he said.
He predicts that gross lending will rise steadily during 2011 and, in the absence of any major economic downturn, should finish 10% to 15% higher than 2010 levels.
‘Strong levels of tenant demand will continue into 2011, particularly given the Government’s planned changes to social housing, and this will provide the continued stimulus for the growth of buy to let lending. There will be strong opportunities for commercial brokers to meet the more complex needs of buy to let borrowers, especially for Houses in Multiple Occupation style property, where we see a growing market,’ explained Terrington.
He points out that the Council of Mortgage Lenders recently stated that low levels of activity in the owner occupier market will remain a feature in 2011 due to ongoing funding constraints, regulatory pressures and uncertain economic conditions, and this will create further pressure on the private rented sector.
‘Landlords should profit from lower void periods and strengthening yields given rising rental levels and a flat housing market. I expect the buy to let mortgage arrears level to be flat to falling as landlords benefit from excellent levels of tenant demand and low borrowing costs, although landlords must be cautious of tenant unemployment and arrears,’ he said.
‘There will be a dislocation between the job losses caused by public sector spending cuts being ironed out by growth in the private sector and we are likely to see unemployment rise during the year. Landlords need to ensure that they have adequate rent guarantee insurance in place to protect themselves against defaulting tenants,’ he added.
Another key issue for landlords next year will be access to buy to let finance, according to Terrington. ‘I expect an improvement in this area. It is expected that we will see a number of new lenders enter the buy to let market in 2011. However, the recent trend has been to focus on smaller scale landlords and there is a risk that we could end up with too many lenders concentrating on this end of the market at the expense of professional landlords,’ he explained.
‘There are more and more lenders squeezing into the same space competing on price, but with little product innovation. The buy to let market is crying out for product innovation and diversity and we will not get that if too many lenders are chasing after the same customer.
‘It is vital that new lenders entering the market do so with a robust valuation process that recognises that buy to let is a very different proposition than the owner occupier market. That sounds like a simple task but too many lenders got it wrong before the credit crunch and were burnt as a result. Valuing a buy to let property as if it were an owner-occupier property doesn’t work, it requires specific expertise and experience,’ he pointed out.
‘Lenders must also be cautious on affordability. Certain lenders are testing affordability on a short-term product rate, rather than a higher reference rate, which could be dangerous when interest rates start to rise, as they are expected to do in 2011. Risk and affordability is not the same thing and the industry must be conscious of this as it underwrites new business,’ he concluded.