Young Index Suvery Shows an Appetite for Investment
July 25, 2011
Increasing numbers of investor landlords say that they are considering purchasing additional investment assets during the next 12 months; a reversal of the previously declining trend seen since the end of 2009.
London leads the way in terms of location with 46.3% of investors considering adding a London property to their portfolio, an increase of 13% on the previous quarter and the largest swing in sentiment seen since Young Index began in 2007.
Appetite for additional PRS assets outside of the capital also grew in the second quarter of 2011, although lags far behind London. During Q2, 13.3% of landlords indicated that they are considering purchasing additional PRS assets outside London over the coming 12 months, an increase from just 9% in the first quarter of the year. Appetite for PRS assets in London has recovered to the level previously seen this time last year, but property outside the capital has not yet regained the same level of appeal.
(See graph below).
Long Term Commitment
This quarter, investors’ anticipated hold period remains virtually unchanged with 56.6% of landlords indicating that they intend to retain their property assets for at least the next 10 years (compared to 55% in Q1 2011). Furthermore, 38.2% intend to hold for the next 20 years or more. A relatively small faction, 5.3%, indicated that they may sell a PRS assert within the next 12 months (an increase of 1% from the previous quarter).
However the current average intended hold period continues its rising trend and has increased from 13.6 years in Q1 this year to stand at 14.2 years. When one considers that the average landlord has let property in the PRS for almost the past 7 years, it is clear that the sector is characterised by investors with an eye on the long-term out-performance of the residential property market. In fact 30.4% of respondents to the latest Young Index survey have let property for 10 years or longer.
Of the small number of investors who indicated that they may sell a residential property asset over the coming 12 months, they were split almost equally between liquidating the asset for cash or for investing in tangible, relatively low risk alternative assets such as art or wine. Interestingly, 26.3% of landlords currently hold these types of alternative investments in addition to their property assets, more than twice the number that did so even just two years ago (11% of landlords held alternative investments in Q2 2009). Over the past 12 months, the percentage of landlords holding cash on deposit, premium bonds and shares have all fallen. Currently, 58.8% of landlords also own equities, down from 68% in Q2 2009. Of other asset classes in which landlords hold investments, only off-shore investments saw an increase in popularity. Currently 23.8% of landlords hold off-shore investment, a huge increase from the 6% who had off-shore investments in 2010.
Finance Remains a Barrier to Acquisition
The ongoing difficulties of securing funding for buy-to-let property purchases or refinancing remains a characteristic of the private rented sector. Despite landlord’s property assets being financed with an average loan to value of 58.6%, more than 60% of investors have not refinanced a property within the past 18 months and 70% have not done so within the past year. The majority of landlords (52.3%) now review the mortgage market less frequently than once a year, only 10.8% do so every six months and none more regularly than that. This is a far cry from the beginning of 2008 when 65% of investors were investigating their mortgage options are regularly as every three months.
Base Rate Expectation
Unsurprisingly, no one expects base rate to fall further than its current historic low of 0.5% over the next 12 months. 15% expect it to remain static and the pace of expected increase has tempered as the rate has continued to remain stable. Currently only 6% of investor landlords expect base rate to be higher than 2% by this time next year. The average 12 month future base rate expectation stands at 1.08%, down from 1.37% predicted in Q1 this year.
Looking at the long-term trend of future base rate expectation, last quarter’s result appears to have been influenced by higher than anticipated inflation figures and increased speculation that the Bank of England’s Monetary Policy Committee (MPC) would be forced to raise base rate sooner than anticipated in a bid to counter the inflationary pressure.
Capital Growth Outlook
The outlook for capital growth of London property has never been higher. 91.3% of landlords currently believe that London property prices will increase or remain static over the coming 12 months, pipping the previous high of 87% in Q4 2010. Interestingly, in landlords’ eyes, the outlook for house prices throughout the UK has also begun to improve. This quarter’s poll reveals that 54.5% of landlords expect property prices outside the capital to be at current levels or higher in 12 months time. This compares to the two-year low of 37% seen in the previous quarter. However, this still represents a fall of 15.6% when compared to Q2 2010, when 70% of landlords predicted that property prices in the regions would rise or remain static. The current predicted outlook marks a reversal of the downward trend seen since Q2 2010 and is the first signs that sentiment between London and the rest of the UK is converging once more. Time will tell whether the perceived buoyancy across the whole of the UK will remain.
However, it should be noted that the volatility in landlords’ outlook, particularly for future capital growth outside of London, masks relatively small anticipated changes in value. The investor landlords polled through the latest Young Index research predict that property prices in London will rise by an average of 1.7% over the coming year, whilst prices outside London will fall by an average of 1.0%.
Capital Growth remains the priority for more landlords than rental income or total returns, but there has been a slight shift in the relative proportions, indicating that landlords are beginning to look to total returns in increasing numbers. An increasing proportion of landlords focus on total returns; 44% in Q2 2011
compared to 37% in 2010.
Income return has been steadily increasing over the past 12 to 18 months as pressure on the private rented sector from frustrated would-be first time buyers continues to add to the increasing underlying demand caused by demographic changes. Young Index polls landlords’ rental income outlook for the coming twelve months and perhaps unsurprisingly the majority of landlords expect rents in the capital to continue to rise over the coming year. 83.8% of landlords expect rental income from London property to rise, compared with 50.6% who predict that UK rents outside the capital will rise.
However, these figures represent a marked drop in confidence of continued rental income increases over the coming 12 months. In the first quarter of this year, a full 100% of landlords expected rents to rise in London and 90% stated that rents would rise throughout the rest of the UK. This changing sentiment mirrors the current state of the market; whilst Young London is still achieving healthy rent increases for investors, the pace of rental increase is slackening.
The landlords polled expect rental income in London to increase by an average of 3.0% over the next 12 months. However, they are preparing for a fall in rental income generated from property assets outside the capital of 0.9% by this time next year. For the landlords questioned, income return was not their primary concern with only 7.7% focusing on rental return. 50.7% indicated that capital growth was more important to them than rental return or total return.
Why PRS Investment
The majority of investors cite pension provision as their principle reason for investing in residential property, followed by the asset class’ proven out-performance, the diversification and balance that residential property assets bring to an investment portfolio and finally, as a suitable vehicle for providing for their children’s future. The principal reasons that landlords hold investment assets in the private rented sector have not changed in relative importance over the past 12 months, but the popularity of the reasons have subtly shifted.