Buy-to-let fills housing gap

The buy-to-let sector continues to enjoy steady growth in the first half of 2007, providing affordable accommodation for increasing numbers of households.

Nigel Terrington, chief executive of Paragon, says: “The private rented sector has expanded in response to a growing need for decent, affordable accommodation, especially in response to a dwindling supply of social housing. Landlords stepped in to meet the demand from people needing flexibility in their choice of housing, as well as those who are deferring their decision to buy a home in an environment of rising interest rates. The latest rise in borrowing costs may cause some prospective homebuyers to stay in rented accommodation for longer – buy-to-let helps fill the housing gap.”

With the number of households in the UK expected to increase further on the back of demographic factors such as population growth, inward migration and rising student numbers, demand for buy-to-let properties continues to push rents up – by slightly more than property prices. Annual rents were up 13% in the first 6 months of 2007, reaching £10,938 in June, while property values rose 10.5% from £162,776 to £179,793, based on Paragon’s July buy-to-let index.

Yields have remained consistently stable at 6% for the past year.

“We’ve seen a stabilisation of yields at around 6% for the last year, reflecting the underlying dynamics of the market. The majority of landlords are cautious by nature, with an average loan-to-value across their portfolios of less than 40%. They have also chosen fixed rate mortgage deals, so are not unduly affected by rising interest rates. Strong tenant demand, on the other hand, tends to place upward pressure on rents.”

Investors remain confident and continue to add properties to their portfolios, in the knowledge that over the medium to long-term a combination of capital appreciation and rental growth will continue to generate attractive returns. This month, annual total ungeared returns rose above 10%, with the average buy-to-let property worth £172,772 a year ago generating rental income of £10,433 in rent and £7,021 in capital appreciation over the past 12 months.

Nigel Terrington concludes: “Not only does buy-to-let generate good returns for investors, but it also performs an invaluable function in providing flexible, affordable housing for a wide variety of tenants. The buy-to-let market remains robust, and all the indicators point to further growth in the future.”