THE booming housing market is expected to slow this year and may even lag behind shares, but experts say there will still be opportunities for buy-to-let investors to make money, writes Clare Francis.
Investors are also being urged to consider commercial property, which is expected to deliver a total return of 7% this year and 8% in 2005.
The number of people buying properties to let has boomed in recent years as house prices have surged and stock markets fallen. But experts are warning that buy-to-let investors should not overestimate returns. House-price growth is expected to slow from a peak of more than 20% at the end of 2002 to between 3% and 9% by the end of this year.
However, house prices in some areas are expected to rise much more, so the key to a good buy-to-let investment will be picking the right area.
The average house price in the north of England rose 30% last year compared with a gain of 7% in London, according to Nationwide. The building society expects the trend to continue this year. Its hot spots for 2004 include Boston in Lincolnshire, Trafford in Greater Manchester as well as Darlington, Lancaster and Stafford.
However, Nationwide also warns that some areas may suffer price falls. In 2003, the average property in some London boroughs, including Wandsworth, Lambeth and Hammersmith & Fulham, slipped in value by up to 4%. Once again, Nationwide thinks the most vulnerable areas this year will be in and around the capital. It says the boroughs of Camden, Bexley, Islington and Ealing are among those most at risk, as well as Gosport in Hampshire, Hastings in East Sussex and Gravesham in Kent.
Even if prices fall in some areas in the short term, property should be a good long-term investment. Over 20 years, house prices have increased fourfold, according to Halifax.
Buy-to-let investors should consider rental demand as well as capital growth before they pick an area. Demand from tenants fell throughout most of 2002 and 2003, according to the Royal Institution of Chartered Surveyors. However, it started to pick up again in the autumn as would-be first-time buyers found themselves priced out of the market and rented instead. There has also been an upturn in lettings to companies who need to find accommodation for workers.
University towns usually have strong demand for rented accommodation. Halifax thinks those in the north of England, such as Lancaster, Newcastle, Manchester and Leeds, could be good places to buy.
Buy-to-let investors should also brace themselves for higher interest rates in 2004. Many experts predict that the base rate could rise from 3.75% to 4.5% by the end of the year.
London Residential Research (LRR), a consultancy, has warned that some landlords may find that their mortgage repayments outstrip rents, particularly in London where the average net rental yield — the income minus costs as a proportion of the current property value — is only about 3.5%.
Geoff Marsh at LRR said: “Rents aren’t going to rise but the cost of debt is likely to go up. There could be a big loss of confidence among amateur investors if they find income is covering only, say, 60% of their debt repayments.”
However, some experts believe such fears may be exaggerated. The majority of landlords opt for fixed-rate mortgages to protect themselves against interest-rate rises. Even those who opt for variable-rate deals should be able to cope with a modest increase in the cost of borrowing.
Investors could also consider commercial property, which includes offices, shops and industrial premises. The sector was badly hit by the economic downturn, but there is evidence that the market has now stabilised and some experts believe it could be a good time to invest.
You should be careful, however, if you choose a commercial property fund. Anna Bowes of Chase de Vere, a financial adviser, warns that many property unit trusts invest in the shares of property companies rather than bricks and mortar.
She recommends Legal & General Property, which is a bond rather than a unit trust, because it invests predominantly in actual property. Alternatively, Patrick Connolly of John Scott & Partners, another adviser, recommends the Norwich Property fund.