Will buy-to-let business continue to boom? A survey by Mintel – Buy-to-let Insurance Market March 2007 – suggests that 2% of all adults plan to buy a UK property to rent in the next three years – potentially doubling the size of the buy-to-let market by 2010. Almost a million people in the UK are ignoring faltering US house prices, seeing their homes as their pensions – a figure that has risen 30-fold in less than a decade.
John Heron, managing director of Paragon, comments: “Traditionally, buy to let has been perceived as something for the more mature investors. However, recently we have been witnessing an increase in the number of younger professionals choosing to make a considered and long term investment in property.” The average investor, according to Paragon expects to hold on to their initial investment property for nearly 11 years and 25% of people stated that their primary motivation for purchasing rental property was so that it could serve as a retirement fund.
Buy-to-let insurance specialist Acumus Insurance Solutions reports that two-thirds of these mini property magnates own a portfolio of two or more houses or flats, and one in seven has between 20 and 50 tenanted buildings. This was contained in Deloitte’s strategic review of the buy-to-let insurance market, prepared for UK Underwriting (Mortgage Solutions, 16/04/07, p7).
The sector has outperformed the wider mortgage market in recent years, now accounting for 11% of total secured mortgage lending. Interest rate differentials have narrowed to around 0.5 to 1% higher than standard loans and, while rental yields are at their lowest level for five years, capital growth and income combined are still offering healthy returns over the medium to long term.
One concern is the raft of new laws to protect tenants, which are putting buy-to-let investment under pressure. Just this month a new Tenancy Deposit Protection scheme required landlords to administer deposits under one of three national arrangements, safeguarding tenants’ interests. As landlords become concerned about the costs of red tape, anecdotal evidence suggests many plan to stop taking deposits, leaving them with little protection from rogue tenants who leave a trail of damage when they move out.
Acumus reports that a whole tranche of semi-professional investors is seeking services to protect their growing portfolios, hassle-free and, increasingly, online. As regulation tilts the balance of power more towards tenants, landlord insurance is becoming a standard part of the mortgage process. Investors know they need protection as integral to their portfolio’s future. Acumus has conducted a detailed broker survey, which finds they are looking for quick cover – typically to insure multiple properties.
Rapid product innovation has undoubtedly made the sector more accessible. Jeff Knight, director of marketing at GMAC-RFC, says: “Product innovation has opened up the market, not just to experienced landlords but also to the mass market who are looking for alternative forms of investment.”
Second property owners carry out their own research, with 14% using internet to search out best deals. But a heavier reliance on intermediaries also features in this sector, with an estimated 80% of those considering buy to let preferring to arrange finance through a broker or independent financial adviser as opposed to around half of the traditional mortgage market. New operators are finding ways of working with traditional outlets to offer packages that provide additional sources of commission.
Point-of-sale technologies are a growing trend across the industry – they quickly and accurately evaluate risk for different types of policies, enabling binding decisions to be taken in seconds. Yet even with some of the largest household names, the only way brokers can get an insurance quote is to download a form and then fax it back.
A spokesman at BM Solutions says: “Technology has allowed lenders to make complex calculations more straightforward.”
Traditional markets, which initially greeted online trading with caution, are becoming aware of its business benefits. Contract certainty is one administrative headache eased by e-commerce – with a virtually 100% guarantee the ‘paperwork’ won’t get lost. Acumus believes its ability to generate an insurance policy in under three minutes from initial log-on gives mortgage brokers a commercial edge.
Brokers report a demand for multi-property discounts for landlords with as few as three properties, and a need to cover all a landlord’s properties on a single policy, dramatically shortening the sales process. A large percentage of the business-to-business market is currently unlicensed to hold clients’ money. So credit card options are becoming important, as well as traditional direct debit schemes. In this way IFAs, brokers, networks and packagers, regulated letting agents and property management companies avoid regulatory burdens, essentially leaving the licensed authority holding the money.
Tailoring may further develop growth. Whereas rented accommodation has typically provided homes for young single people, social changes have meant there is now much wider scope. Professionals enjoy the flexibility to move as their careers require. Freedom to work across the European Union also means there is increased demand from an influx of EU residents seeking work in the UK. This expected growth will see new lenders entering this market. Products will ultimately be tailored to different markets, such as student landlords, HMO properties and portfolio investors.
This is certainly a view with which Acumus agrees, as it watches the market break into discrete segments, each requiring different solutions. Hunting for the larger prey, some of the more pro-active insurers will provide bespoke quotes for portfolios of 20 properties per year. In the mid-tier, multi-property policies are available for landlords with just three or more properties, so the prospective insurance buyer enters the system only once.
At the cheaper end of the spectrum, cover has been added for student lets of more than four tenants and single occupancy flats, while building sum rates for lower value properties worth between £75,000 and £150,000 have been substantially reduced, particularly benefiting those investing in let property for rental income.
Acumus is offering new models and listening hard, in order to tailor its offering to a clear demand. Buy-to-let insurance has developed far beyond being just another version of household cover and is becoming much more specialist. The more firms understand the customer, the more they can offer sophisticated, buy-to-let price points.
The big, strategic challenge for brokers is whether to make a substantial investment in their own systems, or to use the investment of others as a way forward, taking up the offer of online trading through their own websites. Acumus’ scheme can be white labelled at no cost for operators generating significant premiums or Acumus-branded for smaller firms. Acumus projects that gross written premiums will rise to £8m this year, with approximately 20% coming from broker’s online sales.
With a half-million pound investment in its own trading platform underway this year, Acumus believes state of the art technology is the future. Firms offering a combination of good products, good sales and marketing and good IT are rare. But very few providers are light enough on their feet to cover all the business heading their way. n
John Bibby is managing director of Acumus Insurance Solutions