(LONDON) Fergus Wilson, the ex-mathematics teacher dubbed Britain's buy-to-let 'king', says he is selling 700 rental properties before interest rate rises bring 'slaughter' to landlords in the UK housing market.
Mr Wilson, who together with his wife Judith rank among the 1,000 wealthiest Britons according to this year's Sunday Times Rich List, said it was inevitable that interest rates would rise from a historic low, pummelling rental landlords.
'You've got a lot of people who have taken out a mortgage and are right up to their throats' in debt, said Mr Wilson as he settled into a black armchair at a hotel in Maidstone, south-eastern England. 'As soon as rates go up, they're going to be slaughtered.'
Rates are forecast to rise, hurting buy-to-let landlords in particular because they pay more than other mortgage borrowers. The Bank of England base rate, a benchmark for British mortgages, will reach 1.25 per cent by the end of next year from its current 0.5 per cent, according to economist estimates compiled by Bloomberg. Most landlord loans are already much more costly, at 4 per cent or higher, according to personal finance website Money facts.co.uk. The UK has about 1.2 million buy-to-let loans, 11 per cent of the total.
'There are a huge number of people very sensitive to interest-rate rises, both in buy-to-let and owner-occupied mortgages,' said David Watts, a London-based analyst at CreditSights Inc.
The Wilsons bought most of their property empire in the decade to 2007, purchasing houses with two or three bedrooms using interest-only mortgages. At their acquisitive peak, they purchased a house a day in Ashford, a commuter town in the south-eastern county of Kent that boomed after the opening of the London-to-Paris high-speed rail link.
The former teachers used rental income to cover mortgage payments and when house prices rose, they used the equity gained to fund more purchases.
That model has now changed, with many lenders leaving the buy-to-let market altogether and others pushing interest rates substantially higher than the Bank of England base rate, said Ed Stansfield, chief property economist at Capital Economics Ltd, the London-based economics consultancy. In addition, many buy-to-let 'teaser' rates are now resetting at higher levels, he said. Any rise will particularly hurt the 60 per cent of buy-to-let investors owning fewer than four properties, Mr Stansfield added.
The Wilsons, called 'The King and Queen of Buy-to-Let' by newspapers including the Guardian, last week agreed to sell their investment for £180 million (S$407 million) to an asset management company 'possibly representing Russians', Mr Wilson said.
He would not identify the potential buyer, citing a confidentiality agreement. The pair stand to make a £90 million profit after taxes and expenses incurred in the sale, he added.
Buy-to-let, also known as landlord loans, grew in popularity in the decade to 2007, as property prices tripled and banks flooded the economy with cheap credit. Lenders such as Bradford & Bingley Plc and WestLB AG's Basinghall Finance unit offered interest-only mortgages to new landlords. Last year, Bradford & Bingley, the UK's biggest buy-to-let lender, was nationalised and WestLB received a German government bailout. Basinghall Finance is closed to new business, according to Matt Smith, a company spokesman.
While mortgages more than three months in arrears rose to a 12-year high of 2.43 per cent on June 30, according to Council of Mortgage Lenders figures, Bradford & Bingley says its rate is more than double, at 5.88 per cent. British house prices have declined 19 per cent from the August 2007 peak, according to a house price index produced by Halifax, part of Lloyds Banking Group Plc.
The US may also face problems in any housing market recovery. About 7 million properties that are likely to be seized by lenders have yet to hit the market, Amherst Securities Group LP analysts said last Wednesday.
'There's an awful lot of people who have avoided going into arrears simply because interest rates have been so low,' said Mr Stansfield of Capital Economics, who expects property prices to fall as much as 40 per cent from the 2007 peak. 'Anyone looking to refinance a buy-to-let mortgage is going to have an enormous problem because lending standards have been tightened more than for any other type of mortgage.'
The number of buy-to-let mortgage products available to borrowers plunged 94 per cent to 209 as at Sept 24, from 3,662 at the end of August 2007, according to Moneyfacts. Buy-to-let borrowers are 'more susceptible' to any rise in interest rates because they may not be able to raise rents to cover rising mortgage payments when tenants are threatened by stagnant incomes and rising unemployment, CreditSights' Mr Watts said.
'When you've got low rates, there's only one way they can go, and that's up,' Mr Wilson said. 'There's no better time to sell.' - Bloomberg
Source: Business Times, 29 Sep 2009