End of the rental dip for investors?

Those investing in property for buy-to-let purposes have faced a couple of challenges during the credit crunch. One has been that of falling prices and the second has been that of declining rental rates.

Of these, the first has only been a significant problem for those who took the gamble that a short-term profit could be possible. For those doing such things in 2006 and 2007, such a move has backfired badly as house prices have dipped. But for long term investors, matters may be very different, as strategies built on seeing values rise over a period of several years are dependent not on constant rises in price but on an overall increase over a period of time, notwithstanding the possibility of periods - like the present one - in which prices may dip.

But while capital gains considerations may be no great issue for those who might not sell their assets for many years, those depending on rental income have faced more of a challenge as the average rate has dipped in the wake of the supply of such properties increasing. This, of course, has restricted the potential income for landlords.

The question that will arise for investors is whether this situation will continue, given that were it to do so the value of buy-to-let may be reduced. The latest Royal Institution of Chartered Surveyors (Rics) lettings survey may suggest not.

What Rics found was that in the three months to April, the net balance of surveyors reporting falls rather than rises in rents fell from 48 per cent to 55 per cent. While this indicated a further decline in letting costs - which is of course good news for tenants - the longer term trend seems set to moderate, according to those surveyed.

This was shown by the question on expectations for rents, which showed that 25 per cent of surveyors anticipate future declines in rental rates, compared with 41 per cent in the previous quarter.

At the same time, rental demand is still rising, although this too is slowing, with a majority of 16 per cent reporting a rise, down from 42 per cent in the last survey.

Commenting on these tends, Rics spokesman Jeremy Leaf said: "Property transactions are starting to rise from very low levels and the influx of supply in the rental market has slowed as vendors begin to find buyers. Demand for rental property is still high but tenants have been able to take advantage of a flooded market to negotiate lower deals. Even so, the downward pressure on rents should ease in the coming months providing some good news for landlords."

On this basis, any increase in the rate of buying and selling of homes could help investors, not least if reluctant landlords take their homes off the rental market and seek to sell them to owner-occupiers.

A positive sign in that direction has come from the British Banker's Association, whose latest figures on mortgage lending have shown a further increase in approvals, although the net mortgage lending rise of £2.3 billion in May was the weakest in a month since 2001.

If house purchases continue to rise, this trend may help turn the tide for investors, meaning that those who buy property cheaply now could enjoy better rental prospects in the months and years ahead.