Rental homes standing empty in UK property slump

Rental homes standing empty in UK property slump

Friday • April 18, 2008

Mr Richard Lee spent £5.3 million ($14 million) buying 20 rental homes across the United Kingdom with just £150,000 of his own money. Today, the properties are worth about 60 per cent less and owned by the banks that financed the purchases.

Mr Lee, 37, was one of thousands enticed by one of Europe's top five best-performing housing markets during the past decade.

Now, repossessions are mounting and properties stand empty as many investors fail to find the tenants needed to cover their mortgages after a building boom flooded cities — especially Leeds and Manchester — with apartments.

The unravelling buy-to-rent investment market contributed to a 2.5-per-cent drop in home prices last month, the biggest since 1992, a report by mortgage lender HBOS shows. The International Monetary Fund warns Britain is among the countries most likely to follow the US into a housing slump.

Prices may drop 10 per cent this year and next, said an economist at Citigroup Michael Saunders. "Buy-to-let investment was a bubble inside the housing market bubble. It's turning out worse than I thought."

Home purchases by investors such as Mr Lee helped triple housing prices between 1997 and last year. The buy-to-rent market in the UK increased 19-fold to about £190 billion in the same period, according to Savills.

Rental properties generated annual investment returns of about 22 per cent in the five years ended March 31, according to the Association of Residential Letting. By comparison, the FTSE All-Share Index climbed about 12 per cent.

The "virtuous circle" of rental investment that powered the UK housing market was broken by falling property values and banks' retrenchment following record mortgage-related losses. Banks and securities firms have disclosed about US$245 billion of asset writedowns and credit losses since last year.

Average two-year fixed-rate mortgage rates have climbed to 6.5 per cent, or 1.5 percentage points more than the gross rental yield from a property in the first quarter.

Investors like Mr Lee, who have high levels of debt, are now vulnerable to the deflating buy-to-let market.

"Twelve months ago, development was an easy way to make your fortune," said Mr Tom Bloxham, chairman of Manchester-based Urban Splash, which develops derelict sites. "Today, it's a disaster zone."

Mr Lee bought an apartment in the City Gate 2 development in Manchester for £239,500 in October 2005. An identical property in the same building sold for £115,000 earlier this year, said Mr Lee, who has surrendered his keys to the bank.

After purchasing 17 properties in late 2005, Mr Lee said he realised he had overpaid for them. Even so, once he has dug himself out of his current financial woes, he says he will get back into the business.

"Would I do buy-to-let again?" he said. "Without a doubt. But this time, I'll ensure I'm in control of all the levers."— Bloomberg

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