Buy to let – Past and future

Buy to let really came into being when the 1988 Housing Act first introduced Assured Shorthold Tenancies with limted security of tenure, giving landlords improved repossession rights. However the sector really took off in 1997 following adjustments in the Housing Act 1996 and specialist buy to let finance becoming available to open the market to a far wider audience. So now it has come of age, how has this popular asset class performed?

The answer is exceptionally well. Over the past 18 years the average buy to let investment has outstripped all other major asset classes. A recent report showed that every £1,000 invested in rental property in 1996 using a 75 per cent LTV mortgage was found at the end of last year to be worth £14,897. This shows a very healthy compound annual return of 16.2 per cent.

Compared to other options this equates to four times as much as the equivalent investment in commercial property which was worth just £4,494 at the end of 2014. UK government bonds reached only £3,329, UK shares £3,119, and cash a mere £1,959 return for the original investment.

What this scenario helps to illustrate is how buy to let has not only provided very strong returns for average investors since 1996, but how it has enabled many ambitious investors to become seriously wealthy. The combination of strong house price growth and the ability to gear a portfolio has allowed a new class of millionaires to emerge in a way that has generally not taken place with investors in the other asset classes considered.

The report also included an updated 10 year projection for buy to let returns assuming house prices rise 4 per cent a year, rents by 2 per cent a year and mortgage rates rise to 5.5 per cent by 2022.

The projections suggest that every £1,000 invested at the end of last year using a 75 per cent LTV mortgage would be worth £2,874 by the end of 2024. This would show an average annual return of 11.1 per cent, again far exceeding other major asset classes.

In recent years buy to let property investment has become even easier with increasing numbers of ‘turnkey’ investments. These property investments are new builds or conversions that need no work before renting out and often come with management agreements that cover all maintenance and sometimes even tenant management, allowing the owner to have minimal involvement in the day to day running of their investment.

The other advantage of these property investments which can include houses, apartments, student accommodation, etc., is that they can be situated anywhere to maximise rental returns, as there is no need for the investor to live close to them for management purposes.

This new style of buy to let investment can work well for both experienced landlords wanting an easier life and new inexperienced property investors who may prefer a guiding influence with their foray into the buy to let sector.
If the projections for the buy to let industry prove to be even close to correct, property investment looks set to maintain its leading advantage as the investment for the future.

 

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