The general improvement in house price indices in the latter half of 2009 was reflected in landlords’ view of the value of their portfolios, Paragon has reported.

The latest Paragon Mortgages’ Private Rented Sector Trends report for Q4 2009 said average weighted portfolio size increased by 4.2%, from £1.37 million in the third quarter to £1.43 million in the fourth. On a three quarter moving average basis, this was the first increase since the corresponding quarter in 2008.

Taking into account both changes to property values and sales and purchases, 21% of landlords expect to see their portfolio value increase over the next 12 months, compared to 8% who expect values to fall. The remaining 71% believe that their portfolio value will remain stagnant. Overall, landlords expect the average value of their portfolios to be 2.1% higher at the end of 2010.

The growth in tenant demand continues to be supported by a slow housing market and a lack of available mortgage finance for first-time buyers, people with small deposits and those with impaired credit histories. Continued positive net migration and increasing student numbers are also creating strong demand for privately rented property. The latest figures from university application service UCAS shows applications are up 12% on last year.

A quarter of landlords stated that tenant demand grew in quarter four of 2009, compared to 13% who said it declined, with the remaining 62% believing that tenant demand was stable. Over a third of landlords expect tenant demand will strengthen further in 2010, with 36% stating it will end this year higher than current levels. This compares to 7% who predict it will be lower and 45% who believe it will be stable. 12% were unsure how tenant demand would move.

One in 10 landlords is planning to purchase property during the first three months of 2010. Nearly two thirds of those (65%) said they would look to purchase a terraced property, followed by semi-detached houses (25%), flats (20%) and detached property (10%). Terraced housing has traditionally been a popular choice with professional property investors because it is well-constructed, liked by a wide range of tenant groups and can generate strong rental yields.
However, mortgage finance looks set to remain a serious issue for residential property investors in 2010, with mortgage conditions worsening in the final quarter of 2009. An overwhelming majority of landlords (68%) said it was more difficult to secure mortgage finance during the quarter, compared to the previous three months.

Yields strengthened in the fourth quarter after falling in the third. The average yield across landlords’ portfolios was 6.2% for the period, up from 6.0% in the third quarter of the year. Yields, a portfolio’s annual rental income as a percentage of its total value, had been rising since the first quarter of 2008 in line with the general weakness in the housing market, but fell for the first time in five quarters in the three months to the end of September. Landlords expect yields to be largely flat over the next 12 months, ending the year at 6.1%.

58% of landlords said they were worried about the level of regulation required in relation to the running of their property business during the year. Landlords operating in the private rented sector are already heavily regulated with an estimated 50 Acts of Parliament and 70 sets of regulations governing the sector, but more could be on the way. The Government has recently concluded a consultation on the launch of a national mandatory registration scheme for landlords and is due to report its findings shortly.

In addition, HM Treasury (HMT) is currently consulting on whether the Financial Services Authority’s (FSA) remit should be extended to regulate the buy-to-let sector. This is likely to tighten buy-to-let product availability and increase the cost of mortgages, which will have knock-on impacts for both residential property investors and tenants.
With buy-to-let lending levels subdued and mortgage product availability limited, landlords also expressed concerns about how they will fund property purchases in 2010, with 37% stating that they were worried about this. The buy-to-let sector is marked by a lack of competition, with just two lenders accounting for an estimated 90% of current new business.

Other concerns include retaining tenants (32%), finding tenants (31%), tenant disputes (24%), and meeting mortgage payments (12%).

Paragon Group chief executive Nigel Terrington said: “Landlords enjoyed a strong end to the year and enter 2010 with a solid platform on which to build. Last year was one of stability after the volatile events of 2008 – arrears declined