Happy birthday, buy-to-let

Buy-to-let, a term 15 years old this month, is experiencing something of a renaissance amid punishing interest rates and strong rental demand.

Last Saturday marked 15 years to the day since the Association of Residential Lettings Agents coined the phrase 'buy-to-let'. The term was dreamt up to describe an innovative fast-track route to property investment in which any duffer with access to a deposit – and in some cases, not even that – could finance the purchase of property and allow a tenant to pay the mortgage.

At the time, landlords were thin on the ground. Prospective tenants, following the recession of the early-90s, were plentiful. Buy-to-let solved a problem, made many people rich, before finally – some argue – becoming the problem itself.

It’s a sign of Britain's enduring faith in bricks and mortar that 15 years later buy-to-let is once again one of the property market’s growth areas – even though the buy-to-let template has been tainted by the whiff of spiv, the subject of countless get-rich-quick seminars and the centre (or at least close to it) of the 2007 credit crisis. Right now, it’s perhaps the property market’s only growth area.

Buy-to-let yield strength

Despite high-profile buy-to-let magnates of the 90s/2000s (remember the Wilsons, the ex-schoolteachers with a portfolio of 700 properties?) announcing the sector’s death following the credit crunch, buy-to-let investors led a minor surge in bank lending in August, according to the British Bankers’ Association. Between April and June, 2,600 buy-to-let mortgages were agreed each week. The National Landlords Association concurs, pointing to growing demand and rising business throughout the year. The number of products increased by 25% between the first and second quarter, and average loan sizes grew by 6.4%.

The drivers aren’t difficult to fathom. A lack of conventional owner-occupier buyers is keeping prices down, and rising rents mean historically healthy yields for investors with the patience and financial stability to hold on to properties for the long term.

Furthermore, for anyone with a bit of money, the alternatives aren’t exactly obvious. Interest rates are punishing rather than rewarding savers, and the stock market’s terrifying. Nor does there appear to be a shortage of prospective tenants on the cards. A recent report by Scottish Widows predicted the age of the average first-time buyer in the UK to reach 44 once rising student debts worked their way into the system.

Financing options

So how long can this last? According to property investment advisers Assetz, a fair while yet. None of the above factors looks like changing in the immediate future, and their research suggests that three-quarters of landlords are only looking to increase their portfolios in the coming months. Almost half reported gross yields of more than 5.5%. A fifth claimed 9%, some even higher. They’re happy.

Of course, they’ll need financing, and in the past few days desperate demand saw a few lenders pull products from the shelves to give themselves time to draw breath. The Post Office withdrew all its buy-to-let mortgages. Skipton Building Society took away its best ones, as did Kensington and Aldermore.

But there are also new products entering the market. The State Bank of India recently announced its intention to grab a piece of the UK buy-to-let mortgage action. The Yorkshire Building Society is expanding its products and distribution, and the Leeds Building Society has just announced a highly competitive five-year fixed-rate buy-to-let mortgage.

Age of the amateur may be over

It’s time, however, for a perspective-check. The current crop of about 500 buy-to-let mortgages on the market compares with more than 3,500 in 2007. And the amateur end of the sector might be facing a new threat.

In what was arguably a beneficial move for tenants, this year’s Budget altered stamp duty rules to make it cheaper (in some instances, very significantly cheaper) to buy several properties at once. Under the new rules, investors will pay at a band pegged by the average of the properties purchased, rather than the total.

Combined with new guidelines that, the industry hopes, will make it simpler to qualify for tax breaks under real estate investment trusts rules and efforts to encourage institutional investors into the private rented sector, these tax changes could see significant competition for the types of property popular among landlords. The future of the market may well favour more professional, 'brand-name' landlords.