How has the Southampton buy 2 let market fared in 2014?

A number of Southampton landlords have made contact with me recently asking for my thoughts on the future of the buy to let market in Southampton and indeed on how 2014 has fared. In previous posts, I have talked about Southampton’s history of rents, property values, tenant demand and yields; all important matters for a landlord, but we haven’t discussed the future and taken stock of 2014.

Southampton property values rose by 6% (year to Oct 14) according to the Land Registry. Good news all round, but when you consider property values in the city had previously dropped by 17.7% between December 2007 and June 2009, this is not so good. And some landlords who bought at the peak in late 2007 are only coming out of negative equity now.

It should be no great surprise to hear that Southampton property values are starting to slow up as we head into the New Year (that’s a normal season event). Property values in the city were growing at upwards of 1.9% a month in the early summer months, but in later months they slowed to a mere 0.4% monthly increase and for December I feel they will be negative.

Landlords who were active in the early part of the year clearly have done well but as the year progressed we felt that vendor expectation had started to run ahead of the market. We saw an increasing number of properties failing to complete and these were remarketed some weeks later at reduced prices. There is no doubt the new mortgage rules had an impact and surveyors were not comfortable in following the market and in some cases marked down property values, again which resulted in these properties being remarketed. The lack of differentiation in tenanted properties was quite amazing, earlier in the year any property with a tenant in situ was priced at 6 % irrespective of tenant risk, location, condition etc. This resulted in some properties being overvalued by some £20,000 or £30,000. The back end of the year needed more work to find value as prices had already moved ahead but I am pleased to say we have helped a number of investors find good value in Southampton.

The reality is we have had over a year of decent market conditions in Southampton, but now all that pent up demand is starting to fade. The big question moving forward is whether the Southampton market will now be held back by affordability and restricted mortgage lending, and what long term impact this will have on the Southampton property market.

Looking at the UK as a whole, because we can’t look at Southampton in just its little own bubble, the recent rapid rise in house values in some parts of the UK in the early part of the year (especially in London), along with earnings growth that remains below inflation and the possibility of an interest rate rise in 2015, appear to have tempered housing demand. This weakening in demand has led to a modest easing in both property price growth and sales. A moderation in growth looks likely into next year as supply and demand become increasingly better balanced.

Now with the General Election on the horizon, whichever Government takes power, they, along with the Bank of England, have a difficult job to do in balancing the expected rise in interest rates with the continued resurgence of the housing market. They need to ensure the property market doesn’t drop and drag down the economic recovery which may force people who have just recently bought into selling their property at a loss.

So overall I would say that 2014 has been a good year for the Southampton buy 2 let investor with total returns inexcess of 12%. Next year I think capital growth will be slightly lower than 2014 but yields will hold up and I would expect our landlords to generate total returns in the 10% to 11% region.