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Why are landlords selling when rents are high?
There isn't exactly a flood of landlords selling, but given demand is strong and rents are high it's curious nonetheless, says Lorna Bourke
There is an interesting comment in the latest survey of the rental market from the Royal Institution of Chartered Surveyors (Rics). The survey reports that demand for rental property continues to outpace supply as an increasing number of would-be first time buyers are forced to continue renting.
But it then mentions, almost as an aside, that ‘surveyors report that where tenancies are coming up for renewal, some landlords – particularly those in London and the South East – are now choosing to put their properties on the sales market, leaving fewer rental properties available.’ Given that rents are rising in the face of increased demand this is surprising.
Why are landlords selling?
As Rics spokesperson James Scott-Lee points out, ‘the combination of strong tenant demand and a limited stock of good quality properties on offer is pushing rents ever higher across much of the country. This is the case both for houses and flats. Moreover, with mortgage finance for first-time buyers likely to remain in short supply for some time to come, this imbalance is set to persist. The inevitable outcome is that rents will continue to increase.’ So why are landlords selling?
It isn’t exactly a flood of sellers but curious nonetheless, given that demand is strong, voids are short and rents are rising. ‘We don’t really know,’ is the response from Simon Rubinsohn, chief economist at the Rics. ‘Whether it was because there was an opportunity to sell and landlords are taking it, or whether they are taking a view on the market is difficult to know.’
There could be a number of reasons but the most likely is that the small landlords who financed their buy-to-let purchases with loans of 75% or more in the dog days of the market boom in 2007 are now coming up to remortgage their properties and cannot find a deal that stacks up – or even any deal at all.
They may now have very little equity left in the property – not enough to qualify for a remortgage – and with the possibility of further falls in house prices prefer to sell now, even if they have lost some capital, rather than struggle on. Latest figures from the Council of Mortgage Lenders show that 65% of buy-to-let mortgages are remortgages.
Some landlords could be coming up to retirement and want to realise their investments while they still have a profit and before the market falls further. Many of the baby-boomers have now reached this point. Others could be suffering arrears or outright defaults and are fed up with the hassle.
Property is not an easy ride
Property is not a trouble-free asset and demands maintenance as well as time and trouble spent on tenants. These landlords could be struggling to meet mortgage repayments if rental income is suffering a shortfall or has dried up entirely. CML figures show that arrears are running at 2% of loans but repossessions have risen by 9% from 1,700 in the first quarter, to 1,900 in the second quarter of 2011 out of a total buy to let loans of 1.34 million.
The latest survey from the Association of Residential Letting Agents (Arla) for the first half of this year reveals that more than four out of ten Arla members’ offices (42%) said that they had seen an increase in the number of tenants struggling to meet rental payments in the last six months.
‘The last time we saw a sell-off by landlords was the fourth quarter of 2007 as the crisis (credit crunch) began to unfold – then we saw landlords selling with 6.5% responding to our survey saying they were looking to sell,’ says Rubinsohn. The latest figures from the Rics show that 3.6% are contemplating a sale so it isn’t a flood of sellers – but it does seem something of an anomaly.
‘A lot of landlords saw substantial capital growth over a ten-year period and they are not seeing that anymore,’ says Lee Grandin, managing director of Landlord Mortgages. ‘Now they are not seeing much future growth and are cashing up. Others have been a bit burnt by the experience and there is a shortage of good buy to let deals.’ He could be right.
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