Rental investors can forget about turning quick profits

Last year's market dip was felt, but the result is that rents have settled at a more sensible level

As the housing market wobbled at the end of last year, the rental sector shivered. Even by late autumn, nervous lettings agents were pinning their hopes on the New Year. But is the rental market recovering and what is the best advice for landlords?

As the housing market wobbled at the end of last year, the rental sector shivered. Even by late autumn, nervous lettings agents were pinning their hopes on the New Year. But is the rental market recovering and what is the best advice for landlords?

At the start of 2001, rents increased by 5 to 6 per cent but because the financial sector affects London rentals, by the middle of last year they were starting to drop. "Even before 11 September the big financial institutions were starting to lay off staff," says Robert Orr-Ewing, Knight Frank's head of lettings. There was, he adds, "a knee-jerk reaction" from other companies who also cut employees in London. "As a consequence, the year ended with a surplus of larger property in central areas, including Knightsbridge and Kensington."

Some areas benefited. "Some American firms moved to Canary Wharf in the last quarter. Rentals there have been extremely busy, because these companies see London as a safe haven."

A mixed picture in London, but what happened across the rest of the country? Knight Frank's research estimates a 3 per cent increase in countryside rents during 2001, with greater increases in areas such as Oxford and Birmingham and smaller in areas dependent on the London and international financial markets. Mr Orr-Ewing says: "In some cities, including Birmingham, we have seen a change in lifestyle. Living in the city has become desirable and a growing number of people are choosing to rent for longer."

Cities such as Birmingham and Oxford are enjoying an increasing buy-to-let market, but are investors right to be confident? Malcolm Harrison, of the Association of Residential Lettings Agents (Arla), says: "There is no reason for them not to be. But, as with any other investment, they must use their own brains and other peoples' by speaking to lettings agents and making sure they buy for the market, not for themselves."

Thorough research should reveal gaps in the market and show where oversupply has led to falling rents. "There is the odd pocket of glut," Mr Harrison adds. "Don't be fooled by the sexy top end in London. We always say you should invest in moderately priced properties for your area that don't require as much capital, and if you live in central London, search down the road where property is slightly cheaper and you'll have better returns."

He believes there is a confused picture for 2001, but Arla's survey found no significant changes in the lettings market despite the events of September. Mr Harrison said economic forecasts did not affect tenant demand, and softening house prices led to an increase in rental demand.

The increase of single-person households and increased job mobility means the private rented sector is likely to grow, but Mr Harrison warns: "Investors must see it as a medium- to long-term investment, not to make a quick buck." Inevitably, oversupply, particularly at the top end, is good news for tenants.

Mary Hennigan-Lawson, Cluttons' partner for lettings, has many applicants driving a hard bargain. "It's like the Harrods sale out there," she says. Ms Hennigan-Lawson has landlords in W2 who had to accept huge reductions of rent, well below the asking price. "We had two houses which were on for £2,000 per week, but the client eventually accepted £1,500."

Clients may be getting edgy, but she sees differences. "Institutional clients can afford to be flexible because they've got a lot of property but buy-to-let landlords need to rent quickly." Ms Hennigan-Lawson believes lets are down by 10 per cent on last year which, overall, she describes as "very good, with price rises of around 7 to 10 per cent". She says many units are available, and landlords who hold out for higher rents are suffering. "I've seen properties lie empty for six or seven months."

Jane Russam, of Lane Fox, Banbury shudders at the prospect of lengthy void periods. "If I had a property empty that long I'd commit hara-kari." One client, whose property has been empty since September, is causing concern. "He was offered a three-year let on his house which was on at £1,900 a month but he wouldn't accept £1,700 and now he's regretting it."

Ms Russam's portfolio includes rental properties from £550 up to £6,000 a month but, as in London, the top end is causing most concern. "Anything up to £1,000 is buoyant but over £2,000 it's getting more difficult because there just aren't the people there." Banbury's central location attracts professional clients working in Birmingham or High Wycombe, and many rent while searching for suitable property to buy. "We've got loads of people who want to rent for six months but end up there for a year when they can't find the right property."

Last January, sales and lettings were buoyant compared to this year, but, having worked in this sector for many years, Ms Russam is optimistic. "I've never known rentals go really flat and, as long as people aren't greedy and are flexible there will always be someone for their property. They must accept they may not get what they want but if they get a good offer they should go for it."

The mixed market is not a worry to some. In the past six months, 21-year-old pianist Warwick Hewson has bought three investment flats in Stratford, east London, and is anticipating rewards in five years when Eurostar's terminal will be built there. "There is good access to the City and Canary Wharf for renters, yet prices are relatively depressed. It will be a different story in five years, so I want to get in now." Mr Hewson paid £102,000 for his first flat, which rents for £1,000 a month, a return of 10 per cent.

Winkworth's Simon Agace believes this is typical. "We're short of properties within the £600 to £1,200 a week range." How does he foresee the rentals market in 2002? "Rents will stay at the same levels. Last year it was a wild market, with corporate renters paying huge amounts, but now we're seeing a more normal market, and rightly so."

Arla: 01923 896 555.

Knight Frank: 020-7591 8601.

Lane Fox: 01295277161.

Cluttons: 020-7262 6767.

Winkworth: 020-8519 0006