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London and South-East Buy-to-Let: A Smart Investment?

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real estate  United Kingdom  Bank of England  finance  real estate assets  Monetary Policy Committee  National Landlords Association  LTV  London  Debt Finance  Milton Keynes  Buy to Let Finance  Chris Norris  Reading  buy to let market  Andrew Sentance  Elmbridge 

London and South-East Buy-to-Let: A Smart Investment?

By - Wednesday 25 April 2012

Much has been made of the increasing attractiveness of the UK's buy-to-let market, with high residential property prices resulting in a rising number of households entering the private rented sector (PRS), rather than purchasing their own home. The recent Rental Britain report published by Savills and Rightmove revealed there were 4.8 million households in the PRS in 2011, a substantial increase from the 3.4 million recorded five years earlier. Meanwhile, a rising number of lenders are offering buy-to-let finance to potential investors, so is now a good time to enter the sector and, if so, where are the best regions in which to do so?

London and the south-east of the UK stand out from the country's other regions as the top locations for property investment opportunities, with Savills recently noting prime residential markets in the capital saw price growth of 2.8 per cent in the first quarter of this year, compared to the final three months of 2011. In addition, it highlighted the recovery of prime markets in the south-east of the UK, pointing to a 1.5 per cent quarterly rise in the value of homes in the region at the start of this year. According to the firm, places such as Henley, Guildford, Harpenden and Esher experienced particularly robust capital appreciation, with prices climbing by 5.2 per cent, four per cent, 4.5 per cent and 3.9 per cent respectively at the beginning of 2012.

Policy manager at the National Landlords Association (NLA) Chris Norris commented that the buy-to-let sector in London and the south-east offers "very strong" investment prospects. He added house prices in the capital in particular have performed well in comparison to the rest of the UK. According to the forecasts in the Rental Britain study, London real estate is expected to deliver returns of 8.2 per cent over the next decade, while the south-east is predicted to offer a 7.7 per cent return in the same timeframe. The report added the most lucrative markets outside the capital will be Reading, Woking, Milton Keynes and Elmbridge. 

However, while the prospect of strong capital appreciation and rental growth over the next ten years may be appealing, finance is still an issue for many would-be buy-to-let investors. Banks have reined in their mortgage offerings, although the higher loan-to-value (LTV) products are starting to appear on the market again, which means buyers relying on debt to fund their purchases are finding it more difficult to enter the sector. This is not a bad thing, though. Mr Norris explained that, while it is positive to increase the supply of homes in the PRS, there needs to be a balance. "In today's market, 75 per cent is around the highest mainstream LTV that a landlord is likely to find. This represents a sensible and sustainable level of finance in most cases. The difficulties encountered a few years ago stemmed, in part, from unsustainable lending close to 100 per cent of market value, which did not allow any leeway for capital depreciation," he asserted.

Although investors may prefer to be optimistic about the returns on their real estate assets, it is important to be realistic and accept the ever-present possibility that prices can go down, as well as up. Another factor to consider is interest rates, which will undoubtedly rise at some point. The Bank of England's Monetary Policy Committee (MPC) may have held rates at 0.5 per cent in April for the 25th consecutive month; however, inflation above the government's two per cent target may result in rates going up sooner rather than later. Former MPC member Andrew Sentance recently wrote in an article for The Telegraph that the strengthening of the UK's economy could soon put rate rises back on the agenda. Those with mortgages, therefore, need to prepare for this possibility and any investors considering entering the buy-to-let market using debt finance should include this in their calculations.

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*This page is provided for information purposes only and should not be construed as offering advice. IPIN is not licensed to give financial advice and all information provided by IPIN regarding real estate should never be treated as specific advice or regulations. This is standard practice with property investment companies as the purchase of property as an investment is not regulated by the UK or other Financial Services Authorities.

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