Yields will decline but gains are good for landlords
The buy-to-let-market is bouncing back but investors should look to the long term and not expect a bargain, says Graham Bates.
IF you are a property investor, it has been a long six years. If you bought your property investment at the peak of the market, it’s been an especially tough time. But even for anyone who has been investing over the long term, the last few years have been no fun at all.
Few investors would disagree that the best part of buying an asset is seeing its value rise over time. When the value is stagnant, or worse, falling, it does make you question the original decision to part with your hard-earned cash and perhaps, on occasion, even your sanity.
However, as we are continually reminded, property is not a short-term investment vehicle, it is not a quick road to riches or to fast financial freedom. Whatever you may read, any serious property investor will tell you the same thing: successful property investing requires knowledge and time. I have been investing in residential property for over 20 years (long before the buy-to-let boom) and in that time, I have experienced periods of ultrahigh interest rates, rates at rock bottom, rising and falling values and the development of city centre living as well as watching the entire private rental sector change beyond all recognition.
Despite sometimes difficult periods, I remain a total advocate for investing in bricks and mortar. Show me a better long-term investment? Timing the property market is of course notoriously difficult. You can only know the top and bottom of a market in hindsight and nobody has a crystal ball, which is simply another reason why it’s important to view residential property investment as being for the long term (it means you can ride out the troughs).
The one rule you must follow, however, is to ensure that your rental income comfortably exceeds the cost of any borrowing and other overheads associated with renting your property. If these numbers stack up, fluctuating capital values are of less concern and if values are falling, you can wait for the market to improve.
I have long been a media commentator on property and investment matters. The Yorkshire Post has always had a clear handle on what is happening across the property market in our region but the wider national press does not always get it right. Leeds, for example, was once cited as the “empty flats capital of the North” but those of us who have been letting properties here since the start of city centre development 15 years or so ago would tell you just what nonsense this really was. The reality today, just ask any letting agent, is that there is simply not enough quality residential property in the city centre to satisfy the huge demand that exists for privately rented property.
It goes without saying that you need to do your research. Make sure that you buy in the right location within the right development as well as ensuring that your property is well maintained and presented in a good light. With that said, rental demand is an issue that few landlords need to be concerned about. So given that strong tenant demand exists, where does it seem that capital values are now heading?
I believe we are now seeing clear evidence that the value of investment property is increasing in value, a trend I would expect to continue over the medium term and probably for the next 10 years. I have no crystal ball, remember. Properties, including city centre apartments, are selling today on gross yields of eight per cent per annum but don’t expect this to last. There are already examples of investors buying on income yields as low as six per cent and I don’t believe it will be long before this is quite the norm. Just a couple of years ago investors expected doubledigit yields and today these are almost impossible to achieve for quality property assets. So broadly speaking, we are in a rising market and one reason for this is that first-time property investors are once again coming into the market. This is good news – unless of course you are a bargain hunter.
The average buy-to-let loan application in the UK is for £149,000, according to the latest research from the National Landlords Association (NLA). In Yorkshire it is around £200,000 and in Yorkshire it is £103,431.
The study also found that 27 per cent of landlords borrow between £100,000 and £149,999; thirteen per cent borrow between £150,000 and £199,999; five per cent borrow between £200,000 and £249,999; and 12 per cent of landlords borrow over £250,000.
NLA chair Carolyn Uphill says: “While these findings indicate that the current mortgage finance market is healthy, it shows that landlords, and their finance needs, are far from homogenous.
“Like any small enterprise, private-landlords are always looking for an opportunity to invest and this is only possible if their individual circumstances are taken into account by lenders. They need access to tailored, affordable finance which makes investment viable.