The ARLA Review & Index. for Residential Investment

Transcription

1 The ARLA Review & Index for Residential Investment Third Quarter 2012

2 Third Quarter 2012 Compared with three months ago, the average weighted rental return for houses is up from 5.1% to 5.2%. The average weighted rental return for flats, however, has fallen from 5.4% to 5.2%, reversing the increase seen three months ago. On balance ARLA members report increased achievable rent levels over the last six months on all types of rented property. The average proportion of respondents across all property types who now say they think achievable rent levels have increased over the last six months has risen from 45% to 48%, partially reversing the fall seen then. The overall average capital asset value of rented houses has risen by 1.9% over the last three months, the second increase in succession, taking the average value of a rented house to its highest ever level. This increase has come as a result of increases in the average value of rented houses for those managing properties in Prime Central London (up by3.7%) and for the Rest of the UK (up by 3.2%). These increases outweighed a decrease of 1.1% for the Rest of the South East. Over the same period, the average value of rented flats throughout the country was unchanged, keeping the average value of a rented flat at its highest ever level. Within this overall static position, the average for rented flats in the Rest of the UK rose by 6.7%, balancing out the falls for those in the Rest of the South East (down by 2.2%) and for those managing properties in Prime Central London (down by 0.5%). During the last three months, demand in the rented residential property sector has seen a small reduction in terms of the overall proportion of respondents saying that there are more tenants than properties available for them, with the figure falling from 58% to 55%. This overall decline was almost entirely accounted for by the fall for Prime Central London (down from 48% to 39%) although the Rest of the UK contributed to it (down from 58% to 55%). The comparative figure for the Rest of the South East was up marginally from 65% to 66%. Suggesting a move towards landlords increasing their net investment in residential property rather than decreasing it, the proportion of ARLA members who think landlords are currently increasing their net investment in residential property by buying properties has risen slightly from 21% to 22% over the last three months whilst the proportion who think they are currently decreasing their net investment by selling properties is down quite sharply from 17% to 12%. Compared with three months ago, the average void period is down from 3.1 weeks to 2.9 weeks whilst the average number of new tenancies signed up in the preceding three months has risen, although not by as much as past seasonal trends would suggest it should have, with the increase only being from 34 to 35 tenancies. The average proportion of ARLA members offices portfolios which are made up of investment property has fallen from 56% to 51% over the last three months but the average number of purely investment properties which are managed by ARLA members offices is unchanged at 135 properties, perhaps suggesting that other areas of the property market are picking up. On average, ARLA members say that tenants remain in the same property for a period of 19.4 months, a figure which is down from 19.7 months in the second quarter. The proportion of ARLA members offices who believe that they are seeing an increase in rental property coming onto the market because it cannot be sold has risen over the last three months with the figure increasing from 35% to 40%, reversing the fall seen three months ago. Semi-detached and detached houses continue to be the types of property most likely to be coming onto the market for this reason.

3 Third Quarter 2012 (continued) For the first time in a year, there has been a fall in the proportion of ARLA members offices saying that they have seen an increase in the number of tenants struggling to meet rental payments in the last six months with the figure falling from 42% to 38%. There has also been a fall, from 52% to 49%, in the proportion saying that they have seen an increase in tenants haggling with landlords over rents in the last six months. Over the last three months, there has been a rise in the proportion of ARLA members offices saying that they are aware of an increase in tenants asking lenders for references on potential landlords to ensure they are financially viable, with the figure climbing from 7% to 10%, again reversing the change seen in the previous quarter. More than half of ARLA members offices (55%, up from 54% three months ago) say that none of their potential or existing tenant clients ask them if they are licensed, a figure which falls to less than four out of ten (39%, unchanged compared with three months ago) when it relates to potential or existing landlord clients. Nevertheless, a small minority (6% and 1% respectively) say that most or all of their potential and existing tenant and landlord clients ask this question. Only one in fourteen ARLA members offices (7%, unchanged compared with three months ago) think that the proportion of potential or existing clients asking if they are licensed has increased over the last 12 months. ARLA members offices are most likely to encounter, as new prospective tenants, people who would be first time buyers except that they cannot get a mortgage (average ranking of 1.7) with those who have been renting for some years because they prefer renting to buying coming a close second (average ranking of 1.9). Least likely to be encountered are people who are having or have had their house repossessed (average ranking of 3.7) with those who are selling or have sold their house because they can no longer afford the mortgage being in third place (average ranking of 2.8). The order of rankings for all these prospective tenant types, in terms of how often they are encountered, has not changed in the last three months. N.B. All these figures are averages and there will be significant local differences as well as significant differences between individual firms in the same area. The ARLA Review and Index of Returns on Buy to Let Investment is compiled from the results of the quarterly survey of ARLA member letting agents and of investor landlords who subscribe to the ARLA Buy to Let website. This is the largest survey of its kind. The data, which covers yields, rents, void periods, types of rental property, regional differences etc. is drawn from 525 letting offices run by ARLA member firms and 1,168 investor landlords. The Review and Index takes account of capital appreciation so as to provide the data for total returns on Buy to Let Investment both for cash purchases and purchases with a mortgage (geared investment). The Index, which was set up in September 2002, is designed to provide a comparison with other types of investment over a period. However, it should be noted that the Index is a measure of percentage returns on investment and as such does not move in line with inflation whether this be house price inflation or changes in consumer prices. It should not, therefore, be expected to rise over time just because prices have risen. If the Index remains at the same level as it was when it began in 2002, i.e. at 100, this simply means that investment returns for buy to let have remained constant. Thus if returns on investment in buy to let were good in 2002, then an Index of 100 in 2012 means that returns are still good and vice versa. It should also be noted that the Index is affected by changes in the average rate of house price inflation over a 20 year period which is used to estimate capital appreciation over the next 5 years. This 20 year average is changed once each year in the second quarter in order to take account of changes in long term house price inflation. ARLA appreciates the high level of response to these surveys from both member firms and individual investors. The research is carried out on behalf of ARLA by Owen Carey Jones, who is responsible for conducting independent research for a number of mortgage lenders and for their representative bodies. For the detailed results of the ARLA surveys visit

4 The ARLA Index (Q ) Cash Purchase 81.0 (Q ) Geared Investment 94.8 (Q ) Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Annual Rates of Return on Buy to Let Investment The tables below show the annual figures used in calculating the Rate of Return on Buy to Let Investment over a five year period. This result is shown in the last column of each table. Throughout this Review, Rates of Return include both Rental Yield and Capital Appreciation, the latter being calculated using the average rate of house price inflation over the last 20 years, which is changed annually and which was changed with effect from this, the second quarter 2012 survey. Annual Rates of Return on Buy to Let Investment (Cash Purchase) Region Gross Annual Average Net Annual Capital Rate of Return Rental Void Period Rental Appreciation on Inv. Yield (%) (days per year) Yield (%) (% per year) (over 5 years) Prime Central London Rest of London Rest of South East South West Midlands North West North East Scotland/Wales/NI All Regions Annual Rates of Return on Buy to Let Investment (Geared Investment) Region Gross Annual Average Net Annual Capital Rate of Return Rental Void Period Rental Appreciation on Inv. Yield (%) (days per year) Yield (%) (% per year) (over 5 years) Prime Central London Rest of London Rest of South East South West Midlands North West North East Scotland/Wales/NI All Regions

5 Effect on Annual Rates of Return of Different Rates of House Price Inflation The following tables show variations in the average net annual compound rates of return over five years for each region, based upon variations in the anticipated average rate of house price inflation. Annual Rates of Return for Different Rates of HPI (Cash Purchase) Region Average Average Average for Average Average -2% -1% last 20 years +1% +2% (5.89%) Prime Central London Rest of London Rest of South East South West Midlands North West North East Scotland/ Wales/NI All Regions Prime Central London Rest of London Rest of South East South West Region Midlands North West North East Scotland/ Wales/NI Prime Central London Rest of London South East South West Region Midlands North West North East Scotland/ Wales/NI Annual Rates of Return for Different Rates of HPI (Geared Investment) Region Average Average Average for Average Average -2% -1%% last 20 years +1% +2% (5.89%) Prime Central London Rest of London South East South West Midlands North West North East Scotland/ Wales/NI All Regions

6 Quarterly Changes in Average Annual Rates of Return The tables below show how the net annual compound rates of return over five years from this quarter have changed compared to the projection for the last quarter. These figures are based on the average rate of house price inflation over the last 20 years which is changed annually and was been changed with effect from the second quarter 2012 survey. Quarterly Change in Average Annual Rate of Return (Cash Purchase) Region Q4 Q1 Q2 Q3 Change Q3/Q2 Prime Central London Rest of London Rest of South East South West Midlands North West North East Scotland/Wales/NI All Regions Percent Quarterly Change in Average Rate of Return (Cash Purchase) Percent Quarterly Change in Average Rate of Return (Geared Investment) Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q Quarterly Change in Average Annual Rate of Return (Geared Investment) Region Q4 Q1 Q2 Q3 Change Q3/Q2 Prime Central London Rest of London Rest of South East South West Midlands North West North East Scotland/Wales/NI All Regions

7 Differences in Annual Rates of Return for Houses and Flats There is very little overall difference in rates of return between houses and flats although currently flats tend to outperform houses in the south of England and in Scotland, Wales & Northern Ireland with houses outperforming flats in the north of England. Differences in Annual Rates of Return for Houses and Flats (Cash Purchase) Average annual rate of return (%) Region Houses Flats Average Prime Central London Rest of London Rest of South East South West Midlands North West North East Scotland/Wales/NI All Regions Percent Percent Houses Flats Both Houses Flats Both Differences in Annual Rates of Return for Houses and Flats (Geared Investment) Average annual rate of return (%) Region Houses Flats Average Prime Central London Rest of London Rest of South East South West Midlands North West North East Scotland/Wales/NI All Regions

8 Second Quarter Calculation Examples Cash Purchase Example (As used in projecting the Annual Compound Rate of a Return on a Cash Purchase for a five year period without a mortgage) Description amount ( ) Notes Investment Purchase Property purchase price 370,502 Acquisition costs 7,410 2% of purchase price Total investment cost 377,912 Source of Funds Deposit 100% price plus costs 377,912 Mortgage 0% purchase price 0 Rental Yield Gross annual rent - year 1 19, % of purchase price Assumed rate of rent inflation 3.2% p.a. Rent lost in voids 1,078 p.a. 20 days per year Net income after voids - year 1 18,366 p.a. Mortgage interest 0 p.a. Net income after voids and interest 18,366 p.a. AFTER 5 YEARS Value of property after 5 years 493, % per year growth on original value Selling costs 9,865 2% of sale price Value of investment 483,383 Value after 5 years less sale costs Capital growth after 5 years 27.9% Net income yield after 5 years 99,465 Allowing 3.2% rent inflation Annual Compound Rate of Return 9.05% per year Geared Investment Example (As used in projecting the Annual Compound Rate of Return on a Geared Investment over a five year period assuming a 75% mortgage) Description amount ( ) Notes Investment Purchase Property purchase price 370,502 Acquisition costs 7,410 2% of purchase price Total investment cost 377,912 Source of Funds Deposit 25% price plus costs 100,036 Mortgage 75% purchase price 277,876 Rental Yield Gross annual rent - year 1 19, % of purchase price Assumed rate of rent inflation 3.2% p.a. Rent lost in voids 1,078 p.a. 20 days per year Net income after voids - year 1 18,366 p.a. Mortgage interest 6,947 p.a. Net income after voids and interest 11,419 p.a. AFTER 5 YEARS Value of property after 5 years 493, % per year growth on original value Selling costs 9,865 2% of sale price Value of investment 205,506 Value after 5 years less sale costs Capital growth after 5 years 105% Net income yield after 5 years 64,730 Allowing 3.2% rent inflation Annual Compound Rate of Return 21.99% per year Assumptions & Sources of Data 1. The average rate of return on a Cash Purchase is the return based on the purchase price of the property plus initial acquisition costs. 2. The average rate of return on a Geared Investment is the return based on the cash outlay in terms of cash deposit for the purchase (i.e. purchase price less mortgage loan) plus initial acquisition costs. 3. Initial property acquisition costs are assumed to be 2% of the property purchase price. 4. Average gross rental return as a percentage of the property value is taken from the latest survey of ARLA members. 5. The average number of weeks during which a property is not let (the void period) is taken from the latest survey of ARLA members. 6. These figures do not include agents fees and charges nor any estimation of the costs of minor repairs and maintenance. 7. The average mortgage is assumed to be on an interest only basis and to be equal to 75% of the property purchase price. 8. The average mortgage interest rate is taken as Bank of England Base Rate +2.00%. During 2007 and 2008, it was taken as the average 2/3 year fixed rate on offer from leading BTL lenders and before that it was taken as the Bank of England Base Rate +1.75%. 9. The average annual rate of house price inflation is adjusted in the second quarter of the year and is based on the national mix-adjusted average for the last 20 years which was 5.89 for , 5.66 for , 5.21 for , 6.66% for , 7.95% for , 8.21% for , 8.66% for , 8.80 for , 8.70% for and 8.55% for The average annual rate of rent inflation is assumed to be the same as the overall rate of inflation based on the Retail Prices Index (RPI). For this quarter, the figure was 3.20%. 11. Average selling costs are assumed to be 2% of the value of the property at the end of the period. 12. The average Net Return on Investment is based on the outcome after 5 years, before tax. 13. Average rented residential property prices are taken from the latest survey of ARLA members. 14. The figures shown for All Regions are unweighted overall average figures. N.B. The five year projection period has been selected to reflect the likely minimum lifetime for a Buy to Let investment

9 Investor Profiles The average length of time for which respondents have been investment landlords has remained the same, at 12.2 years. 4.2% of respondents have been landlords for less than one year, down from 5.8% three months ago. On average, landlords have 7.7 properties in their portfolio; an increase from the 7.6 properties reported last quarter. 41.2% have one or two properties, down from 39.8% last quarter, while 15.6% have more than 10 properties, slightly lower than three months ago (15.8%). The proportion of investment landlords who do not expect to sell properties over the next twelve months has risen marginally, from 71.7% to 72.6%. The number saying they do expect to sell one or more properties has decreased, from 10.2% to 9.1%. The percentage who expect to buy has fallen, from 25% to 23.8%. The average life expectancy of residential lettings property has decreased, from 19.7 years to 19.2 years. More than eight out of ten (80.5%) landlords expect to keep their property for more than ten years. The majority of landlords asked said that they had become a residential landlord either in order to create a nest egg for the future (39.1%), or to achieve a combined yield from rental income and capital appreciation (44.1%). 1.3% said they had invested for a short term capital gain, an increase of 0.1% on three months ago. The average Loan to Value ratio across buy to let property portfolios has decreased slightly, from 46.3% to 45.8%. Almost a third of respondents (30.1%) estimate the loan to value ratio of their rented residential portfolio to be between 51% and 75%.This is down from 32.3% of respondents last quarter. ARLA surveys for the second quarter of 2012 were carried out in June 2012 among members of ARLA, investor landlords, and members of RLA. For reasons of space, this printed Review and Index does not contain all the results from the quarterly ARLA surveys on which the Review and Index is based. All results are obtainable on the Buy to Let section of the ARLA website, How long have you owned residential property to let? Less than one in ten respondents (9%) had been residential landlords for one year or less whilst one in seven (14%) had been residential landlords for more than 20 years. However, the vast majority, amounting to more than three quarters (77%) had been residential landlords for between 2 and 20 years with the largest proportion, more than three out of ten (31%) having been residential landlords for between 6 and 10 years. This group was closely followed by those who had been residential landlords for between 11 and 20 years (27%). Years as a Landlord Percent of Respondents (%) Mar 12 Jun 12 Sep 12 Less than one One or or to to to Over Average (years) Base: All answering (1,409) (1,073) (1,112)

10 How many rented residential properties do you currently have in your portfolio? More than four out of ten respondents (41%) had only one or two properties in their portfolios with less than half as many (16%) having more than ten properties in theirs. Number of Properties Percent of Respondents (%) Mar 12 Jun 12 Sep 12 One Two to to to to Over Average (no. of properties) Base: All answering (1,402) (1,069) (1,103) Analysis of these results shows that the average size of respondents portfolios was 7.7 properties, up marginally from an average of 7.6 properties three months ago. In the next 12 months, do you expect to buy any further properties to let? Almost a quarter of respondents (24%) said that they expected to acquire further properties to let during the next 12 months but more than half (51%) said that they did not. In addition, a further quarter (25%) were unsure whether or not they would acquire further properties to let in the next year. Response Percent of Respondents (%) Mar 12 Jun 12 Sep 12 Yes No Don t know Base: All answering (1,395) (1,057) (1,090) Compared with three months ago, there has been a small fall (from 25% to 24%) in the proportion saying they expect to buy in the next 12 months and a rise (from 49% to 51%) in the proportion saying they do not. Percent Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q

11 In the next 12 months, do you expect to sell some or all of your let residential properties? More than seven out of ten respondents to this survey (73%) said that they did not expect to sell any of their let residential properties in the next 12 months. Nevertheless, almost one in ten (9%) said they did have such expectations with a further 18% being unsure whether they would be selling any properties in the next 12 months or not. Response Percent of Respondents (%) Why did you first decide to invest in residential property? Mar 12 Jun 12 Sep 12 Yes No Not sure Base: All answering (1,400) (1,064) (1,098) Compared with three months ago, the proportion saying they do not intend to sell some or all of their properties in the next 12 months has increased a little from 72% to 73% but this merely reverses the change seen then. To compensate for this change, the proportion saying that they do have such intentions has fallen from 10% to 9% and this is the second fall in succession. As a result, the proportion saying they are unsure whether they will or not is unchanged at 18%. Where are your residential investment properties located? Nearly half of respondents (46%) said that they had properties in the South East (including London) with two out of ten (20%) saying they had properties in London itself. Location Percent of Respondents (%) Mar 12 Jun 12 Sep 12 Central London Rest of London (inside M25) South East (outside M25) South West Midlands North West North East Scotland Wales Northern Ireland Base: All answering (1,384) (1,054) (1,057) Most respondents either said that they had become residential landlords in order to achieve a combined yield from rental income and capital appreciation (44%) or that they had done so in order to create a nest egg for their long term future (39%). Reason Percent of Respondents (%) Jun 11 Sep 12 Short term capital gain (less than 5 years) Rental income Combined yield from rent & capital apprec Create nest egg for long term future Base: All answering (1,018) (1,039)

12 What is the approximate overall loan to value ratio of your rented residential portfolio? The largest proportion of respondents, amounting to three out of ten (30%) said that the approximate overall loan to value ratio of their rented residential portfolio was between 51% and 75% with more than two out of ten (21%) saying it was between 26% and 50%. Analysis of these figures reveals that the average loan to value ratio of respondents portfolios is 46%. Loan to Value Percent of Respondents (%) Ratio Dec 11 Mar 12 Jun 12 Sep 12 Up to 10% % to 25% % to 50% % to 75% % to 90% Over 90% Average (%) Base: All answering (1,136) (1,205) (894) (925) From original acquisition time, what do you expect to be the average life expectancy of your property investment, before you liquidate your property assets? Clearly the vast majority of residential landlords are in the business for the long term with more than eight out of ten (81%) saying that the average life expectancy of their property investments is more than 10 years. In fact, only one in twenty-five respondents (4%) said they saw their investment as being for 5 years or less and less than one in a hundred (0.7%) saw it as being very short term (i.e. for less than 2 years). Average Life Percent of Respondents (%) Expectancy Mar 12 Jun 12 Sep 12 Less than 2 years to 5 years to 10 years to 20 years Over 20 years Average (years) Base: All answering (1,338) (1,025) (1,049) Average Life Expectancy of Property Investment Before Liquidating Property Assets Jun-12 Sep-12 Simple analysis of these results reveals that the average life expectancy of their property investments for all respondents is 19.2 years, a figure which is down a little from 19.7 years three months ago, reversing the change seen then. 0 Less than 2 years 2 to 5 years 5 to 10 years 10 to 20 years Over 20 years

13 T h e C h a r t e r An Investor should Plan to be a Buy to Let Landlord over the medium to long-term as it is an investment that produces a variable combination of rental yield and capital appreciation. Make an objective business decision when purchasing a property based on research of the needs and requirements of the local market, not based on personal taste. Be aware that the rental market is fast moving with fluctuating supply and demand. This can influence achievable rental levels and occupancy rates. Take informed advice from both professional Letting Agents and specialised financial advisers from the beginning. A Lender should Conduct a thorough analysis of affordability and not lend more than you can afford to repay. Undertake a professional assessment of the security and the reasonableness of the forecast rental income. Provide clear information on Buy to Let products and services and on your obligations as a borrower. Explain what to do if you get into difficulties with mortgage payments. An ARLA Letting Agent should Demonstrate a comprehensive understanding of the legalities, regulations and obligations that apply to Landlords, Tenants and Agents. Provide realistic and up to date guidance on supply and demand based on a detailed local knowledge of the market. Hold Professional Indemnity Insurance, separate Client Bank Account, and be covered under a Client Money Protection Scheme and employ trained, qualified staff. Have access to a complaints process over the standards of letting agents as well as consumer redress which may award compensation where a consumer has suffered loss as a result of service failure by the agent. Deposits held, where appropriate, require to be protected under a Tenancy Deposit Protection Scheme. ARLA 2012 ARLA Administration, Arbon House, 6 Tournament Court, Edgehill Drive, Warwick CU34 6LG Telephone Fax: info@arla.co.uk