Troubled waters for landlords

It seems like only yesterday that every man and his dog wanted to be a buy-to-let investor. Buying off-plan on the waterfront was a passport to riches and staring off into the horizon all we could see were calm waters offering exponential capital growth and a tidy sum each year from rental profits. As the reality of both over-supply of investor-friendly flats and over-optimistic predictions takes hold, however, the tranquil waters of buy-to-let have taken on a distinctly choppy cast.

Paul Mugmaioni, a director of rental sector investors Quality Street dates the sea change in the newbuild rental market to the interest-rate hike around a year ago. That rate raise, allied to a general cooling in the housing market, precipitated a mass investor exodus from buy-to-let and a climate where the speculators consolidated their positions while looking elsewhere for investment opportunities.

The rental expert estimates that oversupply in the rental sector and the effect of large-scale development on supply, particularly at Glasgow Harbour, has seen landlords' annual rental yields slashed and in some cases, the value of some waterside apartments have dropped by 30 per cent.

"I'd question the wisdom of building a rash of apartments on the market at £250,000 in Glasgow or around the £280,000 mark in Edinburgh. Affordability is a massive issue and there are too few people prepared to buy flats that cost as much as family homes. Indeed, with money still so relatively cheap to borrow, there must also be a limit on the number of people who'd eschew a mortgage yet still pay monthly rents of £800+ per month for an executive apartment. "The golden sector is for flats at around £120,000-£190,000 - that's what real people can afford and that's the group we should concentrate on serving," says Mugmaioni.

To this end, Quality Street has just launched its Metro development in Glasgow's city centre. With a range of smart-wired, future-proof apartments from £104,000, the developers' focus is on providing parking, smaller-scale accommodation and a variety of different designs within the development. "Because of the time lag involved in getting projects from inception to completion I'd estimate that most of the apartment developments on our architects' drawing boards were designed with investors in mind." Clearly, then it could be a while before owner occupier-focussed design becomes the norm - a fact that ensures there must be more grim times ahead for Scotland's waterside projects aimed at a shrunken buy-to-let sector and promoted on the back of rental yields and capital-growth returns they now can't possibly deliver.

For DM Hall's Alasdair Seaton, the first thing to be effected in a slowdown are homes that are less than five years old within big developments and estates. "What is trendy in a boom can quickly become unattractive if the market turns. In a cooler environment buyers crave the security of tried and tested properties - quiet residential streets, security, nice period properties. It's human nature that in uncertain times we become more conservative and less speculative and look for a bit of cover for our money."

In Edinburgh, Sundial's William Gray Muir believes that a slowdown means choice for the consumer and an opportunity to burn out all the over-priced and low-quality developments from the market. "With more choice and keener prices for would-be buyers there's less need to make courageous choices or go off piste in search of your ideal home". In that sense anything off the beaten track - from converted churches to executive flats in underdeveloped waterside locations - may take longer to shift than they would in a boom.

Mugmaioni believes that the collapse in the upscale rental market can in part be traced to the lack of large-scale corporate landlords with the wherewithal and foresight to maintain rent levels and effectively manage and market their portfolios with a long-term view. For commission earning agents there are only really two kinds of flats - flats that are 100 per cent rented or flats that are 100 per cent empty and such are the small margins they work to that it's better to drop an advertised rate by £100 per month rather than see a flat go unoccupied. On a grander scale, this practice has seen tenants shop around and necessitated massive rent decreases in the like of Glasgow's Lancefield Quay, leaving the big boys and casual investors alike at the mercy of changing market forces.

Mugmaioni sees the future in Scotland as being shaped by real-estate investment trusts operating at the level of offering quality lets that address the key issues in the market: affordability and comfort. He says: "Developers have got way too used to selling off plan to the detriment of the eventual tenants. 'Will I like living here?' is not the kind of question that an investor need ask himself. Investors are more interested in rental yields, capital gains and cost per square metre.

"I think the kind of Costa Del Sol architecture of waterfront living could really die a death. Owner occupiers, as opposed to investors, want something more substantial, something that feels and looks like a house." Replacing the glass bricks and flat roofs of the last decade, Mugmaioni believes, we'll see an era of niche, small-scale developments on undeveloped brownfield sites and the return of traditional stone, pitched roofs and slate. He says: "America had its modernist boom 15 years ago and this transition from functionality to comfort has already happened there. I'm sure, that's what the future will hold for us".

This article: http://property.scotsman.com/news.cfm?id=1836512005

Last updated: 24-Aug-05 23:32 GMT