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Buy-to-Let - Investing in Property - UK - March 2012

“Although the buy-to-let sector is a niche investment area, a higher number of people are hoping to become landlords or expand their current holdings than those that have left the market. Increasing demand for rental property and lower interest rates have made buy-to-let an attractive investment opportunity, and this should continue over the coming year. However, first-time buyers’ home ownership aspirations will always remain high and demand for rented accommodation will decline once residential mortgage lending and supply of affordable housing picks up.”

– Stevan Obradovic, Financial Services Analyst

Some questions answered in this report include:

  • Are investors more likely to enter or exit the buy-to-let sector?
  • Is there too much hassle involved in being a landlord to make it worthwhile?
  • Is competition and product availability increasing in the buy-to-let market?
  • Will FTBs’ desire for home ownership dampen demand for rental property?

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Table of contents

  1. Introduction

      • Abbreviations
      • Executive Summary

          • The market
            • Market size and forecast
              • Figure 1: Forecast for total value of new buy-to-let mortgage advances, 2006-16
            • Channels to market
              • Market factors
                • Fewer landlords are in arrears but repossession rates have risen
                  • Lender competition and product availability has pushed down average interest rates
                    • Demand for privately rented accommodation is strong
                      • Average value of rented flats and houses increased in 2011
                        • The number of new properties built continues to decline
                          • Companies, brands and innovation
                            • Market share
                              • Brand promotion
                                • Who’s innovating?
                                  • The consumer
                                    • Buy-to-let ownership
                                      • Figure 2: Buy-to-let ownership, January 2012
                                    • House price expectations
                                      • Figure 3: Performance of property prices, January 2012
                                    • Attitudes towards buy-to-let: alternative investment
                                      • Figure 4: Buy-to-let as an alternative investment, January 2012
                                    • Attitudes towards buy-to-let: barriers to entry
                                      • Figure 5: Buy-to-let barriers to entry, January 2012
                                    • What we think
                                    • Issues in the Market

                                        • Are investors more likely to enter or exit the buy-to-let sector?
                                          • Is there too much hassle involved in being a landlord to make it worthwhile?
                                            • Is competition and product availability increasing in the buy-to-let market?
                                              • Will FTBs’ desire for home ownership dampen demand for rental property?
                                              • Future Opportunities

                                                • Lenders and intermediaries can educate buy-to-let investors
                                                  • Friends can realise their investment aspirations together
                                                  • Internal Market Environment

                                                    • Key points
                                                      • Buy-to-let sector is outperforming the overall mortgage market
                                                        • Figure 6: Annual percentage change in gross advances – buy-to-let versus total mortgage market, 2002-11
                                                      • Fewer buy-to-let loans are in arrears…
                                                        • Figure 7: Percentage of outstanding loans three or more months in arrears – buy-to-let and total mortgage market, 2007-11
                                                      • …but repossession rates are higher than in the residential sector
                                                        • Figure 8: Repossession rates for residential mortgages and buy-to-let mortgages, 2010 and 2011
                                                      • Landlords are benefiting from historically low interest rates
                                                        • Figure 9: Bank of England base rate, three-month (monthly average) Sterling LIBOR and effective rate on new mortgages, January 2005-December 2011
                                                      • Number of privately rented dwellings is increasing year on year
                                                        • Figure 10: Total number of UK dwellings, by tenure, 1996-2010
                                                      • Number of buy-to-let mortgages increased by a quarter in the year to February 2012…
                                                        • Figure 11: Buy-to-let product availability, February 2010-12
                                                      • …helping to push down average interest rates
                                                        • Figure 12: Buy-to-let average interest rate, February 2010-12
                                                      • Demand for buy-to-let lending has been positive since Q2 2010
                                                        • Figure 13: Demand for buy-to-let and prime lending (house purchase), Q1 2008-Q4 2011
                                                    • Broader Market Environment

                                                      • Key points
                                                        • Average value of rented property increased in 2011
                                                          • Figure 14: Average value of rented houses versus rented flats, Q1 2007-Q4 2011
                                                        • Difference in returns on geared investments and cash acquisitions
                                                          • Figure 15: Average net annual compound rate of return over five years – geared versus cash purchase investment, Q4 2006-Q4 2011
                                                        • Geared investments offer a 21.6% rate of return over five years
                                                          • Figure 16: Annual compound rates of return on buy-to-let investment over a five-year period – geared investments only, by region, Q4 2011
                                                        • Rising unemployment is a challenge for landlords and tenants
                                                          • Changes in household trends could increase demand for private accommodation
                                                            • Figure 18: UK households, by size, 2006-16
                                                          • Student numbers help to drive demand for rental accommodation
                                                            • Figure 19: Number of students in Further and Higher Education, 2005/06-2010/11
                                                          • Migration trends are having an impact on rental demand
                                                            • Figure 20: Long-term international migration flows – UK, 2000-10 (year end)
                                                          • Number of completed dwellings continues to fall
                                                            • Figure 21: Number of permanent dwellings completed, by tenure – UK, 1990/91-2010/11
                                                        • Competitive Context

                                                          • Key points
                                                            • Consumers have a higher preference towards liquid assets
                                                              • The majority of landlords plan to maintain their holdings
                                                                • Figure 22: Savings and investment plans, by product, July 2011
                                                            • SWOT Analysis

                                                                • Figure 23: Buy-to-let – SWOT analysis, 2012
                                                            • Who’s Innovating?

                                                              • Key points
                                                                • TMW releases iPhone and iPad application for intermediaries
                                                                  • BM Solutions helps intermediaries to inform landlord clients
                                                                    • Buy to Let Purchase Plan launched by Islamic Bank of Britain
                                                                      • NatWest reduces rental cover for higher earners
                                                                        • Six lenders now offer high-LTV buy-to-let mortgages
                                                                          • Specialist lender launches 50 new mortgage products
                                                                          • Market Size and Forecast

                                                                            • Key points
                                                                              • The number and value of loans outstanding increased in 2011
                                                                                • Figure 24: Number and value of buy-to-let mortgages outstanding, 2000-11*
                                                                              • Buy-to-let market is well and truly in recovery
                                                                                • Figure 25: Volume and value of new buy-to-let mortgages, 2001-11
                                                                              • Market forecast
                                                                                • Buy-to-let recovery expected to continue
                                                                                  • Figure 26: Forecast for total value of new buy-to-let mortgage advances, 2006-16
                                                                                  • Figure 27: Forecast for total value of new buy-to-let mortgage advances, at current and constant prices, 2006-16
                                                                                • Forecast methodology
                                                                                • Market Share

                                                                                  • Key points
                                                                                    • LBG and Nationwide play a large part in the buy-to-let market
                                                                                      • Figure 28: Buy-to-let amounts outstanding – selected lenders only, 2010 and 2011
                                                                                  • Companies and Products

                                                                                    • Lloyds Banking Group
                                                                                      • Nationwide
                                                                                        • Paragon Group
                                                                                        • Brand Communication and Promotion

                                                                                          • Key points
                                                                                            • Buy-to-let advertising expenditure has outperformed the overall market…
                                                                                              • Figure 29: Total advertising expenditure on mortgage products, by sub-category, 2007-11
                                                                                            • …but remains a niche area when it comes to product adspend
                                                                                              • Figure 30: Adspend on mortgage products, by buy-to-let advertisers, 2011
                                                                                          • Channels to Market

                                                                                            • Key points
                                                                                              • Direct sales edge ahead in overall mortgage market…
                                                                                                • Figure 31: Proportional distribution of regulated mortgage sales – total market, by channel, 2006/07-2010/11
                                                                                              • …but the buy-to-let market still has a big focus on intermediated distribution
                                                                                                • Figure 32: Distribution channels used by selected buy-to-let lenders, 2011
                                                                                            • Buy-to-Let Ownership

                                                                                              • Key points
                                                                                                • One in nine adults rent out a property
                                                                                                  • Figure 33: Buy-to-let ownership, January 2012
                                                                                                • A number of investors have sold their buy-to-let holdings…
                                                                                                  • …but a bigger number hope to enter the market or expand their portfolio
                                                                                                    • Buy-to-let investing is more accessible to affluent consumers
                                                                                                      • Figure 34: Buy-to-let ownership, by gross annual household income and income tax, January 2012
                                                                                                  • House Price Expectations

                                                                                                    • Key points
                                                                                                      • One in two think that property prices will stay the same in the next year
                                                                                                        • Figure 35: Performance of property prices, January 2012
                                                                                                      • Londoners most likely to think that house prices will grow
                                                                                                        • Figure 36: Performance of property prices, by region, January 2012
                                                                                                      • Young adults are optimistic about property price growth
                                                                                                        • Figure 37: Performance of property prices, by age, January 2012
                                                                                                      • Financial situation has a bearing on house price expectations
                                                                                                        • Figure 38: Performance of property prices, by financial situation, January 2012
                                                                                                      • Growth expectations are higher among landlords
                                                                                                        • Figure 39: Performance of property prices, by buy-to-let ownership, January 2012
                                                                                                    • Attitudes towards Buy-to-Let: Alternative Investment

                                                                                                      • Key points
                                                                                                        • Consumers prefer to invest in property than a pension or stocks and shares
                                                                                                          • Figure 40: Buy-to-let as an alternative investment, January 2012
                                                                                                        • Over-65s show higher preference for pensions than property investments
                                                                                                          • Figure 41: Buy-to-let as an alternative investment, by gender and age, January 2012
                                                                                                        • Landlords favour property over stocks and shares…
                                                                                                          • Figure 42: Buy-to-let as an alternative investment, by buy-to-let ownership, January 2012
                                                                                                        • …with a slightly smaller number also showing preference over pensions
                                                                                                          • Figure 43: Buy-to-let as an alternative investment, by buy-to-let ownership, January 2012
                                                                                                        • Despite favouring property investments, many consumers are unsure about property prices
                                                                                                          • Figure 44: Performance of house prices, by buy-to-let as an alternative investment, January 2012
                                                                                                      • Attitudes towards Buy-to-Let: Barriers to Entry

                                                                                                        • Key points
                                                                                                          • Effort and property prices are considered a barrier by many consumers
                                                                                                            • Figure 45: Buy-to-let barriers to entry, January 2012
                                                                                                          • Buy-to-let investors are less likely to think that being a landlord is “too much hassle”
                                                                                                            • Figure 46: Buy-to-let barriers to entry, by buy-to-let ownership, January 2012
                                                                                                          • Prospective buyers are more optimistic about potential profits
                                                                                                            • Figure 47: Buy-to-let barriers to entry, by buy-to-let ownership, January 2012
                                                                                                          • Landlords are less critical of the buy-to-let market
                                                                                                            • Figure 48: Buy-to-let barriers to entry, by buy-to-let ownership, January 2012
                                                                                                        • Appendix – Market Size and Forecast

                                                                                                            • Figure 49: Best and worst case forecast for the value of new buy-to-let mortgage advances, 2011-16
                                                                                                        • Appendix – Buy-to-Let Ownership

                                                                                                            • Figure 50: Buy-to-let ownership, by demographics, January 2012
                                                                                                            • Figure 51: Buy-to-let ownership, by demographics, January 2012
                                                                                                        • Appendix – House Price Expectations

                                                                                                            • Figure 52: Performance of property prices, by demographics, January 2012
                                                                                                            • Figure 53: Performance of property prices, by demographics, January 2012
                                                                                                        • Appendix – Attitudes: Alternative Investment

                                                                                                            • Figure 54: Buy-to-let as an alternative investment, by demographics, January 2012
                                                                                                            • Figure 55: Buy-to-let as an alternative investment, by demographics, January 2012
                                                                                                        • Appendix – Attitudes: Barriers to Entry

                                                                                                            • Figure 56: Buy-to-let barriers to entry, by demographics, January 2012
                                                                                                            • Figure 57: Buy-to-let barriers to entry, by demographics, January 2012
                                                                                                            • Figure 58: Buy-to-let barriers to entry, by demographics, January 2012

                                                                                                        Companies Covered

                                                                                                        • Birmingham Midshires
                                                                                                        • Cheltenham & Gloucester plc
                                                                                                        • HBOS plc (Halifax Bank of Scotland)
                                                                                                        • Lloyds Banking Group
                                                                                                        • Macquarie Group
                                                                                                        • Nationwide Building Society
                                                                                                        • Paragon Mortgages

                                                                                                        Buy-to-Let - Investing in Property - UK - March 2012

                                                                                                        £1,995.00 (Excl.Tax)