Rents are likely to remain high for the foreseeable future, writes Bob Young, managing director of Capital Home Loans
The flat versus house conundrum has often been one that has exercised property purchasers, particularly those who are starting off on their attempt to get on the housing ladder. In major cities of course this type of dilemma is much less given that the most affordable properties are flats indeed wander round the streets of London and you will often be hard-pressed to find a property that isn’t made up of flats.
For property investors therefore it seemed to make sense to purchases flats in city centres because, a) they represented a huge majority of the available housing stock, and b) people who lived in city centres wanted this type of living anyway – didn’t they? Unfortunately, the Credit Crunch and recession has blown this type of reasoning and property purchase decision out of the water.
Take London out of the equation (apart from perhaps Docklands) and look at cities such as Leeds, Sheffield, Manchester and the like. All underwent considerable reconstructions of their city centres which involved large numbers of new blocks of flats being built, to satisfy this apparent demand and need. Add in significant levels of available finance, a surge in interest in becoming a landlord from the general public, and ‘Property Clubs’ which focused particularly on selling these types of properties to members, and it is little wonder that developers were falling over themselves to put up more and more blocks.
Until of course, the Crunch bit and it quickly became apparent that there was a saturation of the flat market in these areas, with not enough available tenants, and rents falling to a point where when coupled with high maintenance and ground rents they could not cover the mortgage. As a lender we were canny enough to limit exposure to such developments – other lenders were not so fortunate and they found themselves with many, many properties like this which had fallen in value, and were nowhere near washing their face in terms of rental income. Cue the arrears and possession disaster scenario.
This episode in the story of buy-to-let has fundamentally changed the way investors and landlords view the properties they purchase. While there is no doubt that purchasing a flat in the right area at the right price, and pricing the rent at the right level will still ‘do a job’ for investors, these tend not to be the priority purchases. Instead, consider the latest research from Paragon which revealed landlords’ thinking on the properties they want to purchase. Of those looking to purchase this Autumn, 41% were looking for semi-detached homes (up from 28% in the Spring), while 22% were hoping to purchase a detached property (up from 9%).
By opting to increasingly purchase these types of houses rather than flats, it is obvious that landlords are focusing on the ‘family market’ and opting to offer homes which cater far more for this demographic. This is due to a number of reasons notably the fact that houses tend to hold their value far better than flats, they are also likely to be far easier to let given there is no over-supply of such homes, plus the changing economic situation means far more families are likely to be renting in the future which increases the pool of potential renters and increases the rental yield that should be available.
The second point about the supply and building of such properties could however change slightly if we are to take into account a recent announcement by house builder, Barratt. It has recognised the sounder market structure of building family homes rather than flats and has shifted its focus accordingly. It recently acknowledged that younger buyers are not coming to market and subsequently it now prefers to build family homes that can deliver it a higher margin and have more chance of being sold – houses are likely to account for 70% of its sales next year, up from 35% in 2007. Plus the purchasers of those homes are now far more likely to be investors.
One suspects however that its ability to continue to do this will ultimately be determined by the availability of land to build such homes in larger numbers. My own feeling is that there will continue to be a shortage of such properties for the foreseeable future which will keeps rents high and deliver an attractive yield to those who are landlords of such residences.
However, all this goes to prove that we are seeing some sizeable shifts in the housing market and in particular the properties that will be available to rent and the type of people who will become tenants. Renting will no longer be seen as simply the housing choice (or necessity) of the young instead we are likely to see increases in renting from individuals at all life stages but particularly amongst families. Advisers should therefore be available to help their investor clients in seeking out these types of homes and ensure they have the available finance to make the most of these opportunities.
