Don’t get too excited about the buy-to-let recovery, warns Bob Young, managing director of Capital Home Loans
A new year often brings with it a sense of optimism, a focus on the positives of what can be achieved and a determination not to repeat the mistakes of the past. In that sense I have found the start of 2011 to be somewhat baffling, particularly in terms of the focus on the mortgage and housing markets to my mind some of the approaches to the next 12 months seem to have been established on a combination of small amounts of blind optimism coupled with large doses of despair.
Of course, as with all things, the truth of the matter lies somewhere in between which is why I have been keen to dispel some of the blind optimism that appears to be growing in and around the buy-to-let sector. Don’t get me wrong, it is welcome that buy-to-let is being eyed positively again but I should also point out that many who are now suggesting investors run back to property and buy-to-let in particular, were the very same people who not 12 months ago were suggesting that the sector was six feet under and rotting unpleasantly beneath our feet. I’m not sure there can be any other kind of rotting but you catch my drift.
It therefore seems appropriate to provide a ‘true picture’ of buy-to-let at this point and to also outline the reasons why the sector is unlikely to see anything other than slow growth during 2011. Those who might be expecting a mini-boom of sorts in the months ahead are going to be disappointed, although I should point out that this does not mean buy-to-let isn’t a strong, long-term investment choice – prospective new and existing landlords are just going to need a significant amount of money/equity to either get into the market or grow their existing portfolios.
So, what do we have at present? Well, currently we are seeing approximately £600-£700 million worth of buy-to-let completions each month. It will not need me to tell you that this is a long way from the days of 2007 when monthly completion levels were far in excess of this, however, those irresponsible lending days are over and (hopefully) unlikely to return. Back then there was a mad ‘bun-fight’ between lenders (both traditional and specialist) for business now of course we are looking at a market which is essentially only two lenders strong.
BM Solutions and The Mortgage Works are the two main lender options for buy-to-let finance and one might suggest that even these two lenders would say this represents a scarcity of choice for landlords. There has been much talk about the new entrants to the buy-to-let sector over the past year, notably Precise, Aldermore and the return of Paragon, however in the great scheme of things these lenders are not going to change the landscape much from its current outlook.
Indeed, what we would call the ‘specialist lending sector’s’ contribution to buy-to-let lending volumes has effectively been nought for the past two and a half years – it is mainly the banks and building societies that have provided the funding and this looks unlikely to change any time soon. Again, go back to those days of 2007 and just prior to it, and we will find a specialist lending sector providing in the region of 10-15% of the sector’s funding.
Which, as stated earlier, means there is little genuine choice for those seeking buy-to-let finance and we are left with a vanilla-style product offering for landlords. Now, I would be the first to say that post-Credit Crunch vanilla had to be the only flavour available – we could not go on as we were offering every flavour under the sun coupled with every kind of topping as well. Bland had to be the way forward and products with LTVs of 75/80% maximum coupled with rental yield requirements of 125% were, and always will be necessary.
Now, however, there may well be an opportunity to continue responsible lending practices but to also look at product make-up and perhaps inject some innovation back into the sector. These two objectives are not mutually exclusive but, given the current funding situation and the dearth of specialist buy-to-let lenders active in the market, we may we waiting quite some time to see the outcome of any such activity. There may be room for innovation but whether any lender has the chance to deliver it is an entirely different question.
Which almost leaves us back at the very beginning and a continuation of today’s market status quo is likely for some time. Some will suggest that this is no bad thing given the mistakes of the past but I firmly believe that professional landlords, those who have a long-term buy-to-let approach, are now underserved by current funding and product arrangements. They may well have been buoyed by Santander’s suggestion that they will be back into buy-to-let this year, however, all soundings coming from the lender have been focused on the ‘amateur landlord’ customer with only two/three properties.
So, if there are opportunities for lenders in terms of offering funding, product innovation and, rather significantly, a core demand in the marketplace, who can possible benefit from this? Certainly, specialists like ourselves would want to be back out there however our focus at present is very much on looking after our existing book rather than lending again. Which leaves a chance for, what I would call, corporate players who may make a considerable play for the market – perhaps pension funds or the big insurance companies could be the next major buy-to-let players? We shall have to wait and see.
The fact remains that there is clearly plenty of scope for growth in the sector, however the mitigating factors against this are incredibly strong. I have no doubts there will be an increase in buy-to-let lending in 2011 but not at a level that will satisfy most stakeholders. The market has improved – we were never sunk at the bottom of the lake, neither are we swimming powerfully for the shore, so in this marketplace we must be happy to tread water for a while longer.
