Over the last decade investing in property has been a hugely profitable strategy. Those who bought investment properties in 1996 were purchasing an asset with a gross yield of more than 9% financed with borrowing at interest rates below 7%. As prices rose, investment became more popular and specialist mortgage products appeared to cater to this developing market. In just eight years, specialist buy-to-let loans grew from less than 1% of outstanding mortgages to 9.9% in 2007. Even this growth understates the flood of private landlords who have entered the market as many have done so through owner occupier mortgages or other financing regimes.
Quick Property Buying Companies
With yields now below financing costs, life is tougher for the investment community and in response it is evolving. A new breed of Quick Property Buying firms has now sprung up; by some estimates they number 300 already. They offer those people who need to sell a property quickly a rapid service in return for a discount on the prevailing market price. This discount allows them to make money by flipping the property back on to the market at the full price. Alternatively, as the mortgage required to purchase the property is lower but the rent is unchanged, landlords have a better chance of holding a cash positive investment.
There is always a residual level of demand for buyers who can execute transactions quickly, from people who have to move for work or who are frustrated with the traditional buying process, for example. But of greatest interest is the cyclical demand which accompanies shifts in market conditions and the wider economic cycle: chiefly those in arrears on their mortgage and in danger of repossession.
Repossessions on the rise
With the RICS expecting repossessions to total 43,000 homes in 2008, the impact of these firms could be about to rise. By providing a way out to distressed sellers requiring a quick house sale, these firms could provide an additional source of demand during the coming downturn. The business plan of these firms is built around a fundamentally positive view of the future path of UK house prices. This means that these firms could provide a previously unseen source of demand within the UK market during slowdowns, with activity further ramping up at the first sign of recovery in housing prices and activity.
How Quick Property Buying Companies obtain finance
Like the owner occupier market however, financing conditions are key. Most firms remain fairly unsophisticated, using over-the-counter buy-to-let mortgage products. This means that the reduction in transaction times versus the mainstream market is not as significant as might be imagined by prospective sellers. However, the most established and professional firms have tailor made financing agreements that provide a facility against which they can borrow, instead of a traditional mortgage product. These agreements often allow exchange of properties in a matter of days.
In theory, both financing methods should provide these firms with an almost limitless ability to increase the number of purchases they make, as deposits are greatly reduced once the institution providing the finance is convinced that the firm is purchasing a property at a discount. Hence firms will be able to make multiple purchases even if they are relatively poorly capitalised.
But here theory clashes with the present reality. The on-going credit crunch has reduced the availability of buy-to-let mortgages. According to moneyfacts.co.uk, the number of buy-to-let mortgages available in the market has fallen by 43% since July. This will surely limit the ability of some of the newer, less established and less sophisticated market participants to secure funding and could even threaten their existence over coming quarters. So, after a massive flood of new entrants into the market, their could be a consolidation of market share within those firms who are best equipped to secure finance in these more challenging conditions.
The “Quick Property Buying Companies” are a new phenomenon and the evolution of their industry and its impact on the market is full of uncertainties. But their presence adds a new dimension to the market which is sure to change its character over the coming years.
