Interest rates temper buy-to-let market

The lettings market rose at the slowest pace since Q2 2005 especially with flats as buy-to-let investors express caution as profit margins drop thanks to rising interest rates.

The Royal Institute of Chartered Surveyors (RICS) residential lettings survey found that 6 percent more Chartered Surveyors reported a rise than a fall in instructions to let property, compared to 13 percent in the previous quarter.

The slowdown points to a deterioration in landlords’ margins triggered by recent interest rate rises and a renewed fall in gross yields. Only 9 percent more chartered surveyors reported a rise than a fall in instructions to let flats, compared to 19 percent in the last quarter.

Tenant demand for rental property remained solid this quarter, although the pace has eased. Continuing demand from tenants reflects a combination of factors, including a strong economy and rising migration. Chartered Surveyors report that migration from Eastern Europe has impacted upon the demand side of the market as demand exceeded supply for a tenth consecutive quarter, putting upward pressure on rents. The slight reduction in tenant demand – especially for flats – is evidence that some would-be first time buyers have been able to purchase a property.

Surveyors expect rental levels to rise further, though confidence has edged back slightly after reaching record levels. Gross yields declined for the first time in two years, as house prices rose faster than rents, squeezing income investors. Gross yields were 4.6 percent in October compared to 4.8 percent a year ago.

RICS spokesperson Jeremy Leaf commented: “The recent interest rate increases have painted the buy-to-let market as a less than favourable investment. With profit margins potentially reduced, affordability conditions could bite hard into investor’s pockets and push up rents if interest rates rise further in 2007.

But Investors continue to express a high level of confidence in the longer-term buy-to-let market as selling activity remains low. With interest rates still relatively low and the economy gaining steam, first time buyers are again placing a tentative toe in the property market.”