Buy-to-let Property Market (The) - UK - March 2007

Contents

Issues in the Market

Market evolution

Key issues

Market definitions

Abbreviations

Market in Brief

Market origins and expansion

Demand drivers

Market pressures

Booming business

Growth prospects are generally good

Increasing competition

Several lenders have relaxed their criteria

Heavy reliance on intermediaries

Advertising activity picks up in 2006

Mintel’s consumer research findings: second property ownership

Attitudes towards property investment are largely positive

Over two fifths do not rule out becoming landlords in the future

Broader Market Environment

Key points summary:

Changing social and demographic trends

Rising divorce rate drives housing demand

Figure 1: Number of marriages, remarriages and divorces – UK, 1974-2004

Implications and opportunities

Over 4 million adults cohabit

Figure 2: Marital status, by gender – GB, 2004/05

Student population continues to expand

Figure 3: Number of students in Further and Higher Education – UK, 1970/71, 1980/01, 1990/01 and 2003/04

Implications and opportunities

Migration trends

Figure 4: International migration flows, 1975-2004

Implications and opportunities

Economic backdrop – cost of borrowing increases

Recent borrowing activity

Interest rate rises

Inflationary worries

Figure 5: GDP annual growth, CPI, average annual base rate and proportion of workforce unemployed – UK, 1997-2007

Outlook and implications for buy-to-let

Internal Market Environment

Key points summary:

The privately rented sector accounts for around one in ten UK properties

Figure 6: Total number of UK dwellings, by tenure, 1991, 1996 and 2000-06

Buy-to-let accounts for a rising proportion of private rentals

A nation of homeowners

Figure 7: Owner-occupied dwellings as a proportion of total UK housing stock, 1980-2006

Surge in second homes

More buy property overseas

The pros and cons of house price inflation

Figure 8: UK average house prices (mix-adjusted), 1993-2006

Regional house price variation

Figure 9: Mix-adjusted house prices, by region – UK, 1996, 2002 and 2006 (year-end)

Average rents have grown the fastest in the South

Figure 10: Average monthly rents – private sector, England, 1994-2006

Rental yields stabilise

Figure 11: Average rental yields – England and Wales, May 2003-December 2006

Alternative data source

The South East offered buy-to-let investors the highest returns in 2006

Figure 12: Buy-to-let annual return on investment, by region, 2005-06

Nearly three quarters of the capital’s new builds get snapped up by investors

Profile of residential investment landlords: investment motive

Most investors have fairly small portfolios…

Figure 13: Number of rented residental properties in portfolio, December 2006

…and most are in it for the long haul

Figure 14: Average life expectancy of property investment before liquidating proeprty assets, December 2006

Payment defaults in the buy-to-let sector are below the overall market average…

Figure 15: buy-to-let mortgage arrears, maximum LTV and minimum rental cover, 1999-2006

…while repossessions are higher

Increasing regulation is a cause for concern for landlords

Implications

The implications of MCOB for buy-to-let lenders

Competitive Context

Key points summary:

Rising levels of housing equity have boosted personal wealth

Figure 16: Net worth of the household sector, 1999-2005

Implications

The attraction of property

Home as ‘pension’

Returns on saving and investments improve

The Footsie continues on an upward path

Figure 17: FTSE 100 and FTSE All Share – daily index movements, December1999- December 2006

Broker predictions are fairly positive

Strengths and Weaknesses

Figure 18: Buy-to-let mortgage market – SWOT analysis, 2007

Market Size and Forecast

Key points summary:

Context

A mixed picture

A downturn in the housing market could create opportunities for buy-to-let investors

Further expansion likely

Total buy-to-let mortgages outstanding

Figure 19: Number and value of buy-to-let mortgages outstanding, 1999-2006 (year-end)

Strong demand drives new buy-to-let sales

Figure 20: Number and value of buy-to-let sales, 1999-2006

Buy-to-let outperforms total mortgage market

Figure 21: Annual percentage growth rates – buy-to-let versus total mortgage market, 2000-06

Market forecast to grow at a healthy rate

Figure 22: Forecast of new buy-to-let business, 2006-11

Factors incorporated

Market Share

Key points summary:

Mortgage Express has the largest buy-to-let loan book…

Figure 23: Ten largest buy-to-let lenders by balances outstanding and gross advances, 2006

…but BM Solutions claims top spot for new business

Top five account for over half of new buy-to-let business in 2006

Figure 24: Market share of top five buy-to-let lenders, by gross advances, 2006

The market is dominated by mortgage specialists

HBOS is the largest mortgage lender, by some margin

Figure 25: Lenders’ share of UK mortgage market, by gross advances, 2004-05

Note

Northern Rock edges up the mortgage rankings in 2006, by balances

Figure 26: Lenders’ share of UK mortgage market, by balances outstanding, 2004-05

Companies and Products

Key points summary:

Pricing models

Sample product comparisons

Figure 27: Sample buy-to-let mortgages – Money£acts best-buy table, 9 February 2006

Profiles of the largest buy-to-let lenders

Mortgage Express

BM Solutions and TMB

Paragon

GMAC-RFC

Northern Rock

Cheltenham & Gloucester

UCB Home Loans

Capital Home Loans

Bristol & West

Other significant players

Brand Communication and Promotion

Key points summary:

Overall mortgage adspend declines in 2006…

Figure 28: Total advertising expenditure on mortgage products, by product category, 2002-06

…while investment in promoting buy-to-let increases, albeit from a small base

Buy-to-let providers focus their adspend on the press

Figure 29: Proportional distribution of adspend on buy-to-let mortgages versus all mortgages, by media type, 2005 and 2006

Mortgage Express invested the most in buy-to-let advertising in 2006

Figure 30: Adspend on mortgage products, by top ten buy-to-let advertisers, 2006

Channels to Market

Key points summary:

The distribution mix

Figure 31: Main channels to market – illustration, 2006

Intermediaries have a prominent presence in the buy-to-let mortgage market

Figure 32: Distribution channels used by the top ten buy-to-let lenders, by gross advances, in 2006

Improved Web support

The Consumer – Property Ownership and Aspirations

Key points summary:

Survey background

One in 14 homeowners have a second property

Figure 40: Property ownership and intentions to buy, December 2006

Most second homes are rented out

Figure 41: Size of the second-property-owner population, December 2006

A home in the sun

Implications and opportunities

Prospects are positive for the buy-to-let market

Figure 42: Size of the prospective target market for second properties, December 2006

Implications and opportunities

One in six second property owners have plans to expand their portfolio

Figure 43: Intensions to make further purchases, by second property owners, December 2006

Mortgage holders are just as likely to invest in buy-to-let as outright owners

Figure 44: Second property ownership and intentions to buy, by tenure, December 2006

Implications and opportunities

One in ten ABs are second property owners

Figure 45: Property ownership and intentions to buy, by gender, age, socio-economic group, region and ACORN category, December 2006

Implications and opportunities

Younger age groups are keen to grab a share of the spoils

Figure 46: Demographic profile of second property owners and prospective targets – part 1, December 2006

Implications and opportunities

The market is heavily skewed towards ABC1s

Regional hotspots

One in five second property owners are self-employed

Figure 47: Demographic profile of second property owners and prospective targets – part 2, December 2006

The Internet and broadsheets offer best chance of reaching target market

Figure 48: Demographic profile of second property owners and prospective targets – part 3, December 2006

Implications and opportunities

Just 1% of homeowners have a buy-to-let mortgage

Figure 49: Mortgage ownership, by type, December 2006

Interest-only mortgages appeal to property investors

Motivation for taking the interest-only approach

Further analysis

The Consumer – Attitudes Towards Property Investment

Key points summary:

Confidence in property investment is high

Figure 50: Attitudes towards owning and investing in property, December 2006

Few worry about the possibility of a house price crash

Interest-rate rises could push up demand for rented property

Property ownership confers wealth and security

Luck and location play a part

Interest-only mortgage holders are most pro property investment

Figure 51: Attitudes towards owning and investing in property, by type of mortgage, December 2006

Urban Prosperity homeowners strongly favour property over a pension

Figure 52: Attitudes towards owning and investing in property, by gender, age, socio-economic group, region and ACORN category, December 2006

Implications and opportunities

35-44-year-olds are the most anxious about further interest rate rises

Figure 53: Attitudes towards owning and investing in property, by gender, age, socio-economic group, region and ACORN category, December 2006