smaller landlords to be squeezed out of the Buy To Let market

The recession will likely signal the end for many of Britain's smaller buy-to-let landlords,



and poses a grim threat to city-centre new build properties, warn experts at The University



of Nottingham.



New research suggests that while the buy-to-let market will survive the recession, a



"property neutron bomb" will see the disappearance of many smaller private landlords.



Professor Andrew Leyshon and Dr Shaun French from the School of Geography at Nottingham



University compiled the report - "We all live in a Robbie Fowler House: the buy to let



market in retrospect and prospect" - and recently presented their findings to the Financial



Services Research Forum at Westminster Hall in London.



The research suggests smaller landlords will be simply outmatched by more established



players in the market who will be waiting to snap up properties at rock-bottom prices, in



order to bolster their portfolios and property empires.



Speaking about the draw to the buy to let market, Professor Leyshon said: "In one sense you



can understand why this is quite a seductive way for people to try and make money, because



of the historical British attachment to property, and the fact that up until 2003, this was



almost a license to print money, given the rapid advance in property prices.



"But since 2003 it's become a more problematic proposition, because interest rates began



ticking up from then on. That had an impact on yields and the fact that people were buying



in to an already inflated asset, so housing prices were expensive but also then interest



rates were becoming more expensive as well."



But according to Professor Leyshon the squeeze on access to capital is now the major problem



for buy-to-let mortgage holders. "A lot of these BTL mortgages are interest only mortgages,



so they're not actually repaying the principal, and many of them are on rates that need to



be rolled over, and it's not so much that they can't afford these rates if they have to be



rolled over, but do they have sufficient capital?"



Professor Leyshon said these mortgages were originally worth around 75-85% of the value of



the property - loans to value (LTV). There were concerns that some valuers were exaggerating



the prices of properties at the time, which in effect gave people 100% mortgages.



Professor Leyshon said: "When these mortgages have to be rolled over, it's a very different



proposition, because some lenders have reduced their LTVs to 50% for some types of property



so can these people find the capital to fund these mortgages and that's the problem -



interest rates are no longer the issue, but capital is."



The work is the result of a year-long investigation into the buy-to-let market and its



prospects in the current economic climate. It is based on extensive interviews with mortgage



lenders, buy to let landlords and estate agents, in Nottingham and nationally.



Professor Leyshon says the report also presents a dark forecast for new-build properties in



city centres: "Lenders will be looking for mundane, regular sources of income rather than



'fictitious' potential income from as yet unrealised tenants.



"This will put occupied terraced housing on the preferred list over the new-builds,



conversions and over businesses, where the return on investment is not as sure."



This, the report suggests, points to severe geographical limitations to investors, who will



be lured away from the sparkling city-centre apartments to the ordinary suburbs where



occupancy is more or less guaranteed.



It will also, Professor Leyshon suggests, reduce the number of 'passive enrichment'



investors who live outside the area in which they buy properties: "Research strongly



indicates that you need local knowledge and active management to make a success out of the



market. The days of speculative investment in property you haven't seen are rapidly coming



to an end."



First-quarter figures from Moody's, the ratings agency, show that 3.55% of landlords are at



least three months behind on their repayments, up from 0.95% last year.



Repossessions for landlords were also up marginally on the year-ago quarter, based on loans



packaged into residential mortgage backed securities.



Meanwhile, a senior director at Britain's financial watchdog has signalled that flexible



self-certification mortgages could be made extinct.



John Pain, of the Financial Services Authority's retail markets unit, said almost half (45%)



of self-cert loans in 2007 were approved without a check on the borrower's income.



He reportedly added: "While [self-cert] loans are legitimate as a niche product for the



self-employed and certain other borrowers, it should perhaps not be as widely available as



it has been".



A more immediate cleaning up of the mortgage market is in the form of a proposed register



and £50 fee for all private landlords, self-employed or not, for which fresh details have



been published.



Alongside mandatory registration on a new landlords' database, which would contain the



addresses of all their property holdings, the government proposes a new regulator for



agents.



Its response to the Rugg Review also cites a plan to allocate compliant landlords with



registration numbers for use in tenancy agreements, court proceedings and housing benefit



claims.



The National Landlords Association said the measures were "well-meaning but flawed," as



although it backed a clampdown on rogue operators, it opposed the annual collection of



addresses of rented property.



Yet almost any scheme to stamp out the rogues is likely to win over lenders, particularly as



the current climate puts more of onus on them to find realistic and regular sources of



income.



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