The supply of available rental accommodation has more than doubled, writes Simon Carswell, Finance Correspondent
LIFE HAS got that bit tougher for landlords as lenders have reduced the maximum mortgages on residential investment properties and rents have fallen due to a higher supply of rental properties.
A report from property website Daft.ie this week found that the supply of available rental accommodation has more than doubled over the last 12 months to a record high. There were more than 15,000 available properties available to rent at the end of June.
This has pushed rents down 2.2 per cent in the second quarter, leaving them 1.8 per cent lower than last year. This is the first year-on-year decline since the autumn of 2004. Rents fell 3.5 per cent in the first half of the year. Rents in Dublin showed the greatest decline, dropping 3.4 per cent in the second quarter. Rents in the five main cities fell 3.5 per cent, though the declines in Munster, Connacht and Ulster were 3-6 per cent. The average rent has fallen from just over €1,400 at the end of last year to €1,350 in the second quarter.
Landlords and investors are not just being affected by falling rents. Property prices dropped 12 per cent to June from a peak in February 2007, according to the Permanent TSB/ESRI house price index, so the attractive capital gains that encouraged many buyers to become property investors in recent years has disappeared.
The buy-to-let sector accounts for just over a quarter of the €145 billion Irish residential mortgage market.
The next mortgage market report from the Irish Banking Federation and PricewaterhouseCoopers, due to be published shortly, is expected to show a 17 per cent drop (to €2.6 billion) in the value of new buy-to-let mortgages in the first six months of this year, though the decline slowed significantly in the second quarter.
Lenders have taken note of falling property values and the pressure on rents. They have reduced their exposure to the landlord market by lowering the cap on mortgages for residential investment properties and raised rates for landlords at a higher level than for owner-occupier borrowers.
Permanent TSB and Bank of Scotland (Ireland), two of the top three buy- to-let lenders, withdrew completely from the market earlier this year. Last Friday IIB Bank, a top five player in the buy-to-let sector, told brokers (which sell 85 per cent of their mortgages) that it was introducing wide-ranging changes on loans for residential investment properties.
The bank, which, like all its rivals, has restricted new lending amid higher funding costs, has divided rental locations in Dublin into "prime" and "secondary Dublin/Dublin commuter", and classified regional towns as "secondary" for buy-to-let borrowers. The new rules give a snapshot of the areas IIB considers best for rents and where it sees rents most under pressure.
The bank has classified Sandyford and Ballymun in Dublin and commuter towns including Bray, Greystones and Delgany in Co Wicklow, and Maynooth in Co Kildare, as secondary for buy-to- let. In these areas, IIB will only lend investors up to 70 per cent of the value of apartments, whereas it will provide up to 80 per cent for houses - the maximum ratio it has allowed on buy-to-let mortgages. IIB will lend up to 80 per cent on houses and apartments in areas of Dublin it classifies as prime.
The bank limits prime residential investment areas to within 16km (10 miles) of Cork and 8km (five miles) of Sligo town, Galway, Limerick and Waterford. It will only offer up to 70 per cent of the value of city-based houses and apartments to investors seeking to refinance mortgages.
IIB, which is the State's fifth largest mortgage lender, lists 31 regional towns and commuter towns around Dublin where it has capped loan-to-value (LTV) ratios on residential investment mortgages to 70 per cent on houses and 60 per cent on apartments.
The changes at IIB follow similar moves last week at First Active, which has cut back significantly on the maximum mortgage on rural investment properties.
First Active capped the maximum LTV on buy-to-let properties at 50 per cent, but said it would provided up to 70 per cent LTV if the investor was buying in city locations in Dublin, Cork, Limerick, Galway and Waterford where rental income is stronger.
One senior banker said lenders wanted investors to put up more of their own money when taking out new mortgages or refinancing on existing rental properties and to reduce the bank's risk because of falling property values and rents.
Rental yields (the annual rent as a percentage of a property's cost) stand at about 3 per cent, while the cost of repaying loans had risen to 6 per cent, he said. Landlords are clearly being squeezed. "People would have bought rental properties with the anticipation of capital growth but supply is outstripping demand and lenders have to tailor their criteria to reflect that," said the banker. "Rents have fallen marginally and rates have gone up."
Lenders are being forced to take account of a landlord's ability to service a high LTV mortgage in a falling market. With rents declining and a greater supply of available accommodation, for example, in locations surrounding universities, banks have to pare back on buy-to-let LTVs.
Analyst at Davy Stockbrokers Stephen Lyons said there were fewer concerns in the Republic about the buy-to- let sector than in the UK where arrears are rising steadily. He said Irish residential investment mortgages have been backed by deposits of up to 25 per cent of the property's value in some cases and strong rental projections.
However, he added that landlords were facing higher property management and maintenance costs and warned that falling rents would put "stress" on a landlord's ability to service their loans. "If the buy-to-let sector becomes stressed and investors dump a raft of properties onto the market, then it will take longer for the correction in the property market to bottom out."
