Jim Pickard wrote this article in last weekend's FT. I quote a chunk from it because the link may require a subscription:
By Jim Pickard, FT Property CorrespondentOne of Britain's biggest residential landlords is predicting price falls of 20 per cent across the UK housing market amid rising interest rates.
Andreas Panayiotou, chairman of the Ability Group - a private company which has developed about 2,500 flats around London - says the maths on buy-to-let no longer make sense.
"Investors are joining in because people say that residential is great, but they are not experienced enough," he warns.
Investors are pouring money into the buy-to-let market. Landlords took out 171,800 buy-to-let loans in the six months to June, taking the total to 940,000 mortgages, according to the Council of Mortgage Lenders.
Mr Panayiotou said that over the long term investors would still make money. But thousands would be squeezed by the widening gap between yields and borrowing costs.
The entrepreneur, seated at a vast boardroom table in crisp white shirt and impeccable suit, has left his days as an amateur boxer in the East End far behind him.
He started out in the family's small launderette business by developing flats above the shops. In 1996 he set up The Ability Group, buying old warehouses and rundown properties around Hackney and converting them into loft apartments.
Not only was Mr Panayiotou in the right location - Hackney was fast being gentrified - but he had the fair winds of the property boom behind him. Banks were stepping up lending and prices were rising.
The business snowballed. Unlike most residential developers who build and sell on, Mr Panayiotou retained most of his properties, creating what he calls a "build-to-let" empire.
Now, however, he says the writing is on the wall in terms of the limited rental returns achievable from the sector. "What's the point of accepting a yield of 3 per cent when you can get 6 per cent in the bank?" he says.
As interest rates have jumped five times in succession, Mr Panayiotou is even more convinced that he is right. "I think everything is over-valued by 20 per cent, things have been getting way out of control. Prices need to drop to bring returns above the cost of funds."
Yields - rents as a proportion of a building's value - have fallen to record lows as a result of rising house prices and stagnant rents. A typical newbuild flat in London may have a gross yield of just 3 to 3.5 per cent, which, after agency fees, voids and repairs, equates to little over 2 per cent.
Many investors accept a monthly loss because it could be outweighed by capital growth. Some experts believe prices will be supported by a UK housing shortage.
Yet Mr Panayiotou believes that plenty of new homes are being built, but they are being bought by investors, not owner-occupiers. "There are blocks across the country where most of the flats have been bought by buy-to-let investors and many are empty," he says.
He predicts that housebuilders will be hit because many investors have put down deposits on "off-plan" flats but will be unable to pay for them given the rise in borrowing costs.
...
Published: August 31 2007
Low yields, high interest rates (especially now LIBOR seems to be decoupled from the Bank of England repo rate) are a killer combination. The demise of the housing market in the UK has been predicted too many times, but I really think that new investment in UK property is crazy. Regular readers will not be surprised to hear that I think China is much more promising. I am currently trying to raise money for a syndicate to invest in some new properties. If you already know me, get in touch and I will send you some documentation.
