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Buy-to-let Property Investment (Industrial Report) - Ireland - March 2009


During a decade of rampant property price appreciation in NI and RoI, buy-to-let emerged as the darling of investment options for Irish consumers. Year-on-year growth of 10%-plus became the norm, with anything less deemed a disappointment. In one year alone, NI property values gained 46% (2006), while RoI values gained 30% in another (1998). It reached the stage where there were two types of property investors in Ireland: those who had an investment property and those who wanted one.

However, with prices now in reverse and there being little likelihood of anything other than, at best, moderate annual gains for some time to come, the situation has changed dramatically. Negative equity, low rental yield and oversupply of rental accommodation are the new bywords. Alongside this new reality, significant tightening of lending criteria on the part of lenders has all but closed the door on new entrants to the sector.

Main report themes:

  • To what extent will recent declines in property prices impact upon Irish consumers’ evident preference for property as an investment option?

  • With the era of rampant capital gains now seemingly over, will a new breed of property investor emerge: with a longer-term perspective and focused on regular income over fantastic gains?

  • With rental yield poor in both sectors – and an oversupply in some areas – is there any incentive for new investors to enter the buy-to-let market?

  • The extent to which the credit crunch, and cautiousness on the part of lenders, is affecting the buy-to-let sector.

  • Given the demographic trends in both NI and RoI, what are the prospects in terms of demand for private rental accommodation going forward?

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Table of contents

  1. Issues in the Market

      • Key themes in the market
        • Definitions
          • Abbreviations
          • Insights and Opportunities

            • Lending restrictions to reduce supply of rental accommodation
              • Resilience of investors to withstand current crisis
                • Property losses minor relative to pensions and equities
                  • Remortgaging activity likely to increase significantly
                    • Overseas property as an alternative to the domestic market
                    • Market in Brief

                      • More than €33 billion in outstanding buy-to-let mortgages in RoI
                        • NI private rental sector 80,000-strong, accounting for 14% of stock
                          • Economic and financial environment bleak for investors
                            • Strong capital gains have given way to declines and losses
                              • Recovery – when and if it comes – to be region-based
                                • Rental yields offer little consolation
                                  • Tightening of lending criteria hampering activity
                                  • Market Background

                                    • Key points
                                      • Strong foundations for investment in RoI
                                        • Consumers’ investment top-heavy with property – but change underway
                                          • Strong capital gains attracted high levels of buy-to-let investment
                                            • Equally steep declines force reality check and reappraisal
                                              • Income rather than capital gain now the main incentive
                                                • Focus switching to rental yield
                                                  • Unquestioned confidence in property now gone
                                                    • But Irish consumers still predisposed towards property
                                                    • Internal Market Environment

                                                      • Key points
                                                        • RoI property prices in freefall?
                                                            • Figure 1: Quarterly % decline, residential property prices, RoI, 2008
                                                          • Regional variation in RoI price decline
                                                            • NI property prices not far behind
                                                              • Significant variation in decline by property type in NI
                                                                • Regional variation also a feature in NI
                                                                  • Future outlook on property
                                                                    • RoI recovery to be region-based
                                                                      • NI sector in grip of “negative psychology”
                                                                        • Oversupply to affect NI recovery
                                                                          • No NI recovery until 2016?
                                                                            • RoI rents at lowest level since 2006
                                                                              • RoI rental yields vary by region and property type
                                                                                • Expectation for additional rent declines in 2009
                                                                                  • NI rental yields better – but not great
                                                                                    • NI landlords carrying one ‘void’ month per annum
                                                                                      • The phenomenon of the ‘accidental landlord’
                                                                                        • Landlords facing mounting bureaucracy and regulations
                                                                                          • PRTB process deemed more obstructive than helpful
                                                                                            • Building Energy Rating required before renting or selling in RoI
                                                                                              • Tax on second properties could be increased and extended (RoI)
                                                                                                • Taxes raised in RoI’s 2008 budget
                                                                                                  • RoI taxman has property investors in his sights
                                                                                                    • Tenancy deposit protection mandatory for UK landlords
                                                                                                      • Change to CGT regime to benefit NI short-term investors
                                                                                                        • Licensing requirements for ‘houses in multiple occupation’ (NI)
                                                                                                        • Broader Market Environment

                                                                                                          • Key points
                                                                                                            • Both economies facing challenging times
                                                                                                              • RoI
                                                                                                                • NI
                                                                                                                  • Low levels of confidence impacting negatively on property investment
                                                                                                                    • Interest rates cut to all-time lows
                                                                                                                      • But resultant gains bypassing buy-to-let sector
                                                                                                                        • Some benefit to buy-to-let investors from low inflation
                                                                                                                          • Impact of credit crunch renders all else irrelevant
                                                                                                                            • Background to credit crunch
                                                                                                                              • Significant ‘tightening’ of credit availability in UK during Q4 2008
                                                                                                                                • Similar tightening by RoI lenders
                                                                                                                                  • Less enthusiasm among lenders for buy-to-let financing
                                                                                                                                    • And more buy-to-let investors feeling the heat
                                                                                                                                      • Lack of affordability likely to sustain rental demand
                                                                                                                                        • Lending restrictions hampering first-time buyers
                                                                                                                                          • Oversupply of housing – but development now stalled
                                                                                                                                              • Figure 2: Residential units completed per 1,000 of population, NI, RoI & GB, 2002-08
                                                                                                                                            • RoI
                                                                                                                                              • NI
                                                                                                                                                • Impact
                                                                                                                                                • Demographic Trends affecting Rental Demand

                                                                                                                                                  • Key points
                                                                                                                                                    • Demographics suggest cause for optimism
                                                                                                                                                      • Irish population forecast to exceed 7 million within a decade
                                                                                                                                                        • ‘Ageing of Ireland’ likely to increase demand for smaller homes
                                                                                                                                                          • Declining household size to boost rental demand
                                                                                                                                                            • Increasing job mobility to generate demand for flexible accommodation
                                                                                                                                                              • Steady growth in student numbers to boost rental demand
                                                                                                                                                                • Change in perception of renting as a long-term option
                                                                                                                                                                  • Boost to rental sector from immigration may not sustain
                                                                                                                                                                  • Competitive Context

                                                                                                                                                                    • Key points
                                                                                                                                                                      • ‘Premium’ available on lump sum deposits
                                                                                                                                                                        • Freefalling equities register huge losses
                                                                                                                                                                            • Figure 3: Equity market index returns, global, 31 December 2008
                                                                                                                                                                          • Little likelihood of Irish consumers embracing equities any time soon
                                                                                                                                                                            • Already a limited ‘equities culture’ among Irish consumers
                                                                                                                                                                              • Pensions seen as main alternative to property
                                                                                                                                                                                • RoI pension funds slide 35% to lose €27 billion in 2008
                                                                                                                                                                                  • Even longer term performance offers little encouragement
                                                                                                                                                                                    • UK pension funds lose a more modest 10% in 2008
                                                                                                                                                                                      • Best opportunities may lie in non-traditional investments
                                                                                                                                                                                      • Strengths and Weaknesses

                                                                                                                                                                                        • Strengths
                                                                                                                                                                                          • Weaknesses
                                                                                                                                                                                          • Market Value

                                                                                                                                                                                            • Key points
                                                                                                                                                                                              • Outstanding buy-to-let mortgages valued at over €33 billion in RoI
                                                                                                                                                                                                • Figure 4: Outstanding buy-to-let resdiential mortgage lending, € billion, RoI, 2004-08
                                                                                                                                                                                              • Almost 80,000 private rental units in NI, comprising 14% of total housing stock
                                                                                                                                                                                                • Figure 5: Total number of private rented residential units, 000s, NI, 2001-08
                                                                                                                                                                                              • Overall UK data indicate decline in NI buy-to-let activity in 2008
                                                                                                                                                                                                • Future outlook
                                                                                                                                                                                                • Suppliers

                                                                                                                                                                                                  • Key points
                                                                                                                                                                                                    • RoI
                                                                                                                                                                                                      • Allied Irish Bank
                                                                                                                                                                                                          • Figure 6: AIB mortgage interest rates, owner-occupier and buy-to-let, RoI, February 2009
                                                                                                                                                                                                        • Bank of Ireland (RoI)
                                                                                                                                                                                                          • Figure 7: Bank of Ireland buy-to-let mortgage interest rates, RoI, February 2009
                                                                                                                                                                                                        • Educational Building Society
                                                                                                                                                                                                          • First Active
                                                                                                                                                                                                            • Figure 8: First Active, buy-to-let and owner-occupier mortgage rates, RoI, February 2009
                                                                                                                                                                                                          • ICS (t/a The Mortgage Store)
                                                                                                                                                                                                            • KBC
                                                                                                                                                                                                              • Ulster Bank (RoI)
                                                                                                                                                                                                                • NI
                                                                                                                                                                                                                  • Abbey
                                                                                                                                                                                                                      • Figure 9: Abbey, buy-to-let mortgage offer, UK (incl. NI), February 2009
                                                                                                                                                                                                                    • Halifax (Bank of Scotland)
                                                                                                                                                                                                                        • Figure 10: Halifax buy-to-let mortgage options, UK (incl. NI), February 2009
                                                                                                                                                                                                                      • Mortgage Works
                                                                                                                                                                                                                        • Northern Bank
                                                                                                                                                                                                                            • Figure 11: Northern Bank, Investment mortgages, rates, NI, February 2009
                                                                                                                                                                                                                          • Ulster Bank (NI)
                                                                                                                                                                                                                          • Appendix

                                                                                                                                                                                                                            • Market background
                                                                                                                                                                                                                              • Property price growth: NI (2001-08)
                                                                                                                                                                                                                                • Figure 12: Annual house price growth, NI, 2001-08
                                                                                                                                                                                                                              • Property price growth: RoI (1997-2007)
                                                                                                                                                                                                                                • Figure 13: Annual house price growth, RoL, 1997-2007
                                                                                                                                                                                                                                • Figure 14: House price growth, by region, RoI, 1996-2007
                                                                                                                                                                                                                              • Internal market environment
                                                                                                                                                                                                                                • Declining property prices: RoI and NI
                                                                                                                                                                                                                                  • Figure 15: Indexed asking prices, residential property, RoI, 2005-08
                                                                                                                                                                                                                                  • Figure 16: Chronology of decline, property prices, RoI, 2008
                                                                                                                                                                                                                                  • Figure 17: Year-on-year % decline, residential property prices, RoI, Q4 2008
                                                                                                                                                                                                                                  • Figure 18: % declines, year-on-year and from peak, by region, RoI, Q4 2008
                                                                                                                                                                                                                                  • Figure 19: Average price, residential property by type, % annual change, NI, Q3 2007-Q3 2008
                                                                                                                                                                                                                                  • Figure 20: Average price, residential property by region, % annual change, NI, Q3 2007-Q3 2008
                                                                                                                                                                                                                                • Future outlook on property prices
                                                                                                                                                                                                                                  • Figure 21: Expectation of property sector recovery, IAVI members, NI and RoI, January 2009
                                                                                                                                                                                                                                • Declining rents: RoI
                                                                                                                                                                                                                                  • Figure 22: Index of average rents, residential property, RoI, 2002-08
                                                                                                                                                                                                                                • Rental yields by region and property type (RoI)
                                                                                                                                                                                                                                  • Figure 23: Average rental yield by region, residential property, RoI, Q3 2008
                                                                                                                                                                                                                                  • Figure 24: Average rental yield by property type, RoI, Q3 2008
                                                                                                                                                                                                                                  • Figure 25: Percentage change in rents, actual and expected, RoI, 2007-09
                                                                                                                                                                                                                                • Rents and rental yield (NI)
                                                                                                                                                                                                                                  • Figure 26: IAVI members’ responses to “Have you noticed a change in the number of residential properties for rent in the second half of 2008?”, NI, January 2009
                                                                                                                                                                                                                                  • Figure 27: % change and expected % change, residential rents, NI, January 2009
                                                                                                                                                                                                                                  • Figure 28: Annual rates of return on BtL investment, by region, UK, Q4 2008
                                                                                                                                                                                                                                  • Figure 29: Average rent (£ per week) for private rented sector, by region, UK, 2007
                                                                                                                                                                                                                                  • Figure 30: Average monthly rent by district council area, NI, 2007
                                                                                                                                                                                                                                  • Figure 31: Average rent per month by property type, NI, 2007
                                                                                                                                                                                                                                  • Figure 32: Average rent by number of bedrooms, NI, 2007
                                                                                                                                                                                                                                • Tenant turnover and void periods (NI)
                                                                                                                                                                                                                                  • Figure 33: Length of time of residence for private rented sector, by region, UK, 2007
                                                                                                                                                                                                                                  • Figure 34: Average void period (days per year), BtL properties, UK, Q3 & Q4 2008
                                                                                                                                                                                                                                • Regulation
                                                                                                                                                                                                                                  • Figure 35: Issues addressed by the Private Residential Tenancies Board (PRTB), RoI, 2008
                                                                                                                                                                                                                                • Broader Market Environment
                                                                                                                                                                                                                                  • Economic outlook
                                                                                                                                                                                                                                    • Figure 36: Economic outlook, NI and RoI, 2007-09
                                                                                                                                                                                                                                  • Loan criteria: Buy-to-let mortgages
                                                                                                                                                                                                                                    • Figure 37: Changes in LTV and rental cover requirements for buy-to-let mortgages, UK, 1999-2006
                                                                                                                                                                                                                                  • Demographic factors: Population growth
                                                                                                                                                                                                                                    • Figure 38: Population (in millions), NI and RoI, 2002-07
                                                                                                                                                                                                                                    • Figure 39: Population projection (millions), NI and RoI, 2007-31
                                                                                                                                                                                                                                  • Demographic factors: Population change by age
                                                                                                                                                                                                                                    • Figure 40: 2006-based Population projections, by age group, NI and RoI, 2006-26
                                                                                                                                                                                                                                  • Demographic factors: Household size
                                                                                                                                                                                                                                    • Figure 41: Number of persons in household, RI, 1996-2006
                                                                                                                                                                                                                                    • Figure 42: Number of persons in household, NI, 2002-06
                                                                                                                                                                                                                                    • Figure 43: Projected % increase in number of households, England, Wales & NI, 2001-21
                                                                                                                                                                                                                                  • Demographic factors: Student demand
                                                                                                                                                                                                                                    • Figure 44: Number of full-time undergraduate students, NI and RoI, 2002-06
                                                                                                                                                                                                                                    • Figure 45: Average rents paid by students in private rented accommodation, UK, May 2008
                                                                                                                                                                                                                                  • Demographic factors: Immigration
                                                                                                                                                                                                                                    • Figure 46: Number of non-nationals living in RoI, 2002-07
                                                                                                                                                                                                                                    • Figure 47: Extent of immigration, NI, April 2005-April 2006
                                                                                                                                                                                                                                    • Figure 48: Breakdown of overall first-time buyer property market, RoL, 2002-07
                                                                                                                                                                                                                                  • Affordability
                                                                                                                                                                                                                                    • Figure 49: Analysis of affordability, residential property, RoI, 2008
                                                                                                                                                                                                                                    • Figure 50: Analysis of affordability, residential property, NI, 2008
                                                                                                                                                                                                                                    • Figure 51: Change in median income and median mortgage, £, first time buyer, NI, 2002-07
                                                                                                                                                                                                                                  • Supply of housing
                                                                                                                                                                                                                                    • Figure 52: Number of house completions, RoI, actual and forecast, 2005-09
                                                                                                                                                                                                                                    • Figure 53: Private sector housing starts, NI, 2008
                                                                                                                                                                                                                                  • Competitive context
                                                                                                                                                                                                                                    • Cash
                                                                                                                                                                                                                                      • Figure 54: Selected interest rates on lump sum deposit, 12 months, UK, February 2009
                                                                                                                                                                                                                                      • Figure 55: Best available interest rates on lump sum deposit, 12 months, RoI, February 2009
                                                                                                                                                                                                                                      • Figure 56: Value of savings market, actual and forecast, RoI, 2003-12
                                                                                                                                                                                                                                      • Figure 57: Value of savings market, actual and forecast, NI, 2003-12
                                                                                                                                                                                                                                    • Equities
                                                                                                                                                                                                                                      • Figure 58: Proportion OF Irish consumers with investment in stocks and shares, NI and RoL, 2000-07
                                                                                                                                                                                                                                      • Figure 59: Share ownership, by socio-economic background, NI and RoI, 2007
                                                                                                                                                                                                                                      • Figure 60: Agreement that ‘owning stocks and shares is too risky an investment for me’, NI and RoI, 2001-07
                                                                                                                                                                                                                                      • Figure 61: FTSE 100 and FTSE all share – daily index movements, December 2000-December 2008
                                                                                                                                                                                                                                      • Figure 62: Extremes of equity market history, worldwide, 1900-2006
                                                                                                                                                                                                                                      • Figure 63: Annualised % real return on equities globally, 1900-2006
                                                                                                                                                                                                                                    • Pensions
                                                                                                                                                                                                                                      • Figure 64: Group pension managed fund returns, RoI, 31 December, 2008
                                                                                                                                                                                                                                      • Figure 65: Group pension managed funds, average returns, RoI, 31 December 2008
                                                                                                                                                                                                                                      • Figure 66: UK pension funds, weighted average returns, 31 December 2008
                                                                                                                                                                                                                                    • Market value
                                                                                                                                                                                                                                      • RoI
                                                                                                                                                                                                                                        • Figure 67: Outstanding buy-to-let residential mortgages as % of total outstanding residential mortgage finance, RoI, 2004-08
                                                                                                                                                                                                                                        • Figure 68: Year-on-year % growth in value of outstanding residential mortgage lending (buy-to-let and total), RoI, 2005-08
                                                                                                                                                                                                                                        • Figure 69: Breakdown of outstanding residential mortgage lending, % share, RoI, September 2008
                                                                                                                                                                                                                                        • Figure 70: Breakdown of residential mortgage lending, € millions, RoI, September 2008
                                                                                                                                                                                                                                        • Figure 71: Households by tenure, RoI, 2006
                                                                                                                                                                                                                                        • Figure 72: Households by tenure, NI, 2002-08
                                                                                                                                                                                                                                        • Figure 73: Private rented housing stock as % of total occupied stock, NI, 2001-08
                                                                                                                                                                                                                                        • Figure 74: Total occupied housing stock by tenure, %, NI, 2007-08
                                                                                                                                                                                                                                        • Figure 75: Prevalence of private rental housing (highest and lowest), as % of total housing stock, by region, NI, 2006

                                                                                                                                                                                                                                    Companies Covered

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                                                                                                                                                                                                                                    Buy-to-let Property Investment (Industrial Report) - Ireland - March 2009

                                                                                                                                                                                                                                    £827.00 (Excl.Tax)