Buy to Let on Trial
In 1993 the launch of the Buy to Let initiative by ARLA warranted no comment outside of the specialist financial services and property related press, and none of its exponents could have envisaged the popularity and growth that has ensued.
Had Buy to Let not been so successful, then it is doubtful that it would have become the target for the selfsame journalists who had been promoting it in the late 1990s as the panacea to all the perceived problems with pensions and endowment policies. In 2002 they turned on Buy to Let as the latest financial services villain to relieve the ever innocent investor of his hard-earned money. During the summer a series of press articles have examined anecdotally, and often in isolation, certain facets of the market and pre-judged the future of Buy to Let - perhaps now is the time to set out the case for the defence across the three principal features of Buy to Let and let you, the jury, decide.
Charge 1
The prosecution states that investors are being drawn into Buy to Let on the false expectation of making significantly better than average returns on both a yield (cash flow) basis and longer term capital growth.
Counsel for the Defence would wish to bring your attention to the following.
Firstly, rented property exhibits two features - namely that of rental return, producing an annual cash flow, and a longer term based return of capital growth that can be theoretically measured on an annual basis but in practice is only ever fully realise
When the property is sold or refinanced, creating additional liquidity. The mixture between these two elements varies dependent upon the class of property and its location but the simple view is that properties that tend to have a higher rental and cash flow return will often have more modest capital growth, whilst primer properties with a lower rental yield have a greater propensity towards capital growth. Investors intrinsically understand this blend and, in establishing their portfolios, determine what is important to them and how to finance properties accordingly.
Secondly, as with other forms of investment, there are direct and indirect costs to be taken into account in working out the total return, but the majority of Buy to Let investors make direct investment into the property market, thereby cutting out middlemen in the transaction, and can more directly influence the performance of the investment than certain other investment types.
Thirdly, it has been suggested that investors do not have access to data on which to base sound decisions. Whilst much is available on the internet and from ARLA, the RICS and CML, there is even a specialist Property Investor Show focusing on this market. Launched for the first time at ExCel in Docklands for 3 days (20-22 September 2002), the show attracted 7,619 visitors, of which nearly 5,000 attended the seminars on topics ranging from taxation to management and loan structuring. In his written submission Nick Clark, MD of Homebuyer Events, believes attendance would have been greater were it not for the Countryside 'Liberty and Livelihood' March on the final day.
Finally, over the past 10 years residential property has shown home owners and Buy to Let investors a good return in most parts of the UK on both a cash flow and capital growth basis. Over a similar period, inflation has significantly reduced, thereby ensuring a decent rate of real return.
Charge 2
That the Buy to Let market has been responsible for house price inflation generally and, in particular in London and the south-east, by the number of investors buying into the market, as evidenced by the vast increase in Buy to Let lending in the last three years.
BBC television in July carried a major item on the monthly release of CML lending figures, when it compared the total amount of Buy to Let lending - at that time declared at £14.7 billion - with the CML figures for total residential lending for the month of £17.1 billion. The ensuing interview with an academic left no-one in doubt that the property market was being stoked up by Buy to Let lending and that the correlation between the Buy to Let figure and the CML figure should be taken as comparable data.
The Defence at this juncture would like to make a submission to the Court that this particular charge should be struck from the register as entirely unfounded and scurrilous, and would like to bring in as evidence the actual CML figures for Buy to Let lending released in September 2002, which show total advances (since Buy to Let data has been collated) of £19.1 billion spread across 232,000 mortgages, with only an average advance of £82,000. In the first six months of 2002, CML statistics show new mortgage advances on owner occupier residential property to be £97 billion compared with £4.4 billion of Buy to Let over the same period. The Buy to Let sector accounts for such a small proportion of financed housing stock that in order for it to have any impact on the rest of the total market, it would have to exhibit inflationary tendencies not seen since the late 1970s. Defence Counsel contends that linking two wholly unrelated parameters for measuring market activity invalidates this charge.
Charge 3
That there are now so many Buy to Let properties generally available that rental yields are falling, and that in London in particular this is compounded by such a glut of rental property that voids of anything up to five or six months are not uncommon.
The Defence would like to call as its expert witness Andrew Reeves, a Council Member of the Association of Residential Letting Agents (ARLA), whose credentials in the Buy to Let scene are undoubted as he was the driving force to the Buy to Let initiative from inception until 2000.
Covering the Central London and Kent market his views are highly pertinent to rebuff this charge.
"In Central London, rental voids in the early months of 2002 were higher than expected and the summer months always sees an increase as international staff are rotated but not always replaced until a month or two later. This year the trend was more noticeable than 2001 but by mid August their pick up was stronger than expected with much ground from earlier in the year being recovered.
Generally ARLA agents in Central London are reporting improving demand especially in the one and two bedroom flats in the value range £250,000 - £500,000. However, investors who have bought off plan in riverside schemes with two bedroom two bathroom flats supported by developer rent guarantees are struggling to identify tenants to rent them new properties. This is a small but high profile part of the market but has attracted high levels of press comment out of proportion to the market as a whole."
In addition to the comments of our expert witness, the Defence would also contend that the early years of the Buy to Let initiative were fortunate in generally experiencing high demand and relatively low property supply, as many people were reluctant to commit to the mortgage market, having lived through the high interest rates of the last recession, but still required to live in a property. As supply picked up but mortgage rates reduced, the pendulum has swung back the other way, but documentary evidence from the quarterly Paragon Investor Confidence Tracking index for August 2002 shows that for 85% of their landlords, the average period they have to wait after one tenant leaves before another moves in is less than four weeks, with less than two weeks being the norm for more than 42% of all landlords.
In summing up, Counsel for Defence contends that the second charge should be struck from the Register and that the other two charges can only warrant a Not Guilty verdict. Were these charges being considered under Scottish law, Counsel would be happy to accept the Scottish finding of Not Proven in both instances and let time be the final judge.