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Smaller landlords to be squeezed out of the Buy To Let market

The recession will likely signal the end for many of Britain's smaller buy-to-let landlords,

and poses a grim threat to city-centre new build properties, warn experts at The University

of Nottingham.

New research suggests that while the buy-to-let market will survive the recession, a

"property neutron bomb" will see the disappearance of many smaller private landlords.

Professor Andrew Leyshon and Dr Shaun French from the School of Geography at Nottingham

University compiled the report - "We all live in a Robbie Fowler House: the buy to let

market in retrospect and prospect" - and recently presented their findings to the Financial

Services Research Forum at Westminster Hall in London.

The research suggests smaller landlords will be simply outmatched by more established

players in the market who will be waiting to snap up properties at rock-bottom prices, in

order to bolster their portfolios and property empires.

Speaking about the draw to the buy to let market, Professor Leyshon said: "In one sense you

can understand why this is quite a seductive way for people to try and make money, because

of the historical British attachment to property, and the fact that up until 2003, this was

almost a license to print money, given the rapid advance in property prices.

"But since 2003 it's become a more problematic proposition, because interest rates began

ticking up from then on. That had an impact on yields and the fact that people were buying

in to an already inflated asset, so housing prices were expensive but also then interest

rates were becoming more expensive as well."

But according to Professor Leyshon the squeeze on access to capital is now the major problem

for buy-to-let mortgage holders. "A lot of these BTL mortgages are interest only mortgages,

so they're not actually repaying the principal, and many of them are on rates that need to

be rolled over, and it's not so much that they can't afford these rates if they have to be

rolled over, but do they have sufficient capital?"

Professor Leyshon said these mortgages were originally worth around 75-85% of the value of

the property - loans to value (LTV). There were concerns that some valuers were exaggerating

the prices of properties at the time, which in effect gave people 100% mortgages.

Professor Leyshon said: "When these mortgages have to be rolled over, it's a very different

proposition, because some lenders have reduced their LTVs to 50% for some types of property

so can these people find the capital to fund these mortgages and that's the problem -

interest rates are no longer the issue, but capital is."

The work is the result of a year-long investigation into the buy-to-let market and its

prospects in the current economic climate. It is based on extensive interviews with mortgage

lenders, buy to let landlords and estate agents, in Nottingham and nationally.

Professor Leyshon says the report also presents a dark forecast for new-build properties in

city centres: "Lenders will be looking for mundane, regular sources of income rather than

‘fictitious' potential income from as yet unrealised tenants.

"This will put occupied terraced housing on the preferred list over the new-builds,

conversions and over businesses, where the return on investment is not as sure."

This, the report suggests, points to severe geographical limitations to investors, who will

be lured away from the sparkling city-centre apartments to the ordinary suburbs where

occupancy is more or less guaranteed.

It will also, Professor Leyshon suggests, reduce the number of ‘passive enrichment'

investors who live outside the area in which they buy properties: "Research strongly

indicates that you need local knowledge and active management to make a success out of the

market. The days of speculative investment in property you haven't seen are rapidly coming

to an end."

First-quarter figures from Moody's, the ratings agency, show that 3.55% of landlords are at

least three months behind on their repayments, up from 0.95% last year.

Repossessions for landlords were also up marginally on the year-ago quarter, based on loans

packaged into residential mortgage backed securities.

Meanwhile, a senior director at Britain's financial watchdog has signalled that flexible

self-certification mortgages could be made extinct.

John Pain, of the Financial Services Authority's retail markets unit, said almost half (45%)

of self-cert loans in 2007 were approved without a check on the borrower's income.

He reportedly added: "While [self-cert] loans are legitimate as a niche product for the

self-employed and certain other borrowers, it should perhaps not be as widely available as

it has been".

A more immediate cleaning up of the mortgage market is in the form of a proposed register

and £50 fee for all private landlords, self-employed or not, for which fresh details have

been published.

Alongside mandatory registration on a new landlords' database, which would contain the

addresses of all their property holdings, the government proposes a new regulator for

agents.

Its response to the Rugg Review also cites a plan to allocate compliant landlords with

registration numbers for use in tenancy agreements, court proceedings and housing benefit

claims.

The National Landlords Association said the measures were "well-meaning but flawed," as

although it backed a clampdown on rogue operators, it opposed the annual collection of

addresses of rented property.

Yet almost any scheme to stamp out the rogues is likely to win over lenders, particularly as

the current climate puts more of onus on them to find realistic and regular sources of

income.

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