Buy-to-let pitfalls

Buy-to-let may be fine in London, but beware elsewhere, says Chris Partridge

The traditional north/south divide in the property market no longer exists. The market is now split into London and everywhere else.

In London, the property market is still strong, buoyed up by a tide of money from international investors from Ireland to China. Everywhere else, the market is now weak and oversupply of some types of property is causing problems in provincial centres.

It is important that buy-to-let landlord understand the differences between London and "everywhere else" because it has a major impact on the investment decision. The main difference is that London has a tradition of renting as well as owner-occupation. Especially in the inner city, renting is seen as the thing to do by young professionals who want to experience the metropolitan buzz rather than create a nest.

Everywhere else, smart new apartments in city centres are competing with relatively cheap housing in suburbs that are fairly close at hand. This is particularly true of the industrial cities of the north.

In London, the purchase price may be higher but the yields are better and more predictable, says Dominic Agace of Winkworth estate agents: "In London, one- to two-bed flats in a period property with outside space remain most popular for English investors as there is an underlying demand for this type of accommodation to rent. New developments are more popular with international investors."

According to Dominic Grace, the head of residential development at Savills, the London market for rented flats is strong, supported by international investment and a large pool of renters. But he points out that most provincial city centres are entirely new - nobody actually lived there before the new wave of regeneration projects.

Such projects have succeeded in bringing several moribund city centres to life, notably Manchester, Leeds and Newcastle, but some believe that too many apartments have been built too quickly.

"This is an un-established market being oversupplied with small, developer-led properties," says Chris Town of the Residential Landlords Association.

The focus on young professionals who are assumed to have a deep need for an edgy, urban, clubbing lifestyle ignores the fact that people grow up and start thinking mistily of a more peaceful existence.

"There's talk of a five-year city living burnout before these people have had enough and want to get out into the suburbs and this is already beginning to happen. I'm hearing stories of apartments becoming difficult to let and landlords being forced to drop rents," Town says.

At first, buy-to-let landlords from the South moved into the North, attracted by relatively low prices. Now many are disillusioned and the funds have dried up.

"Apartments are already standing empty in many regenerated northern city centres," Town says. "I know one where 50 per cent of units are unoccupied."

Purpose-built flats with hundreds of individual owners are not usually physically suitable for any other use. "The tragedy for our cities," says Town, "is that there's no going back. Building patterns, nationally, have shifted from houses to apartments and a fashionable housing trend has already been allowed to change city landscapes."

Town fears that a slide in capital values and rents will push such blocks into a spiral of neglect and decay, eventually turning them into the sink estates of tomorrow. This prospect can only be averted by the government and planners working together.

One aspect of the solution is simple - put a brake on huge flats in central areas until the current stock is occupied and people begin to get a taste for apartment living in areas where they are more used to living in suburban houses.

But the other area where urgent action is needed at the national level is to rebalance employment from the South East to the North. If people are given a better chance to make a decent living in the North, it could save both the dangerously overheated London market and the precarious regional markets by spreading housing demand.