buy to let and let to buy misuse - cml conference_19 june 2013

Buy-to Let &

Let-to-Buy

“MISUSE”

Tony Moroney,

Director - Financial Services

19 June 2013

DISPUTES & INVESTIGATIONS • ECONOMICS • FINANCIAL ADVISORY • MANAGEMENT CONSULTING

Navigant Overview

Fast facts

International professional services company

Significant Financial Services presence in US and UK

Publicly traded since 1996 (NYSE:NCI)

2012 revenues: $850 M USD

Approximately 1,900 professionals globally

Services

Management Consulting

Disputes & Investigations

Economic Consulting

Financial Advisory

Industries

Financial Services

Energy

Healthcare

Construction

Public Sector

Navigant Consulting, Inc. is an independent global consulting firm providing specialised professional services to assist clients in improving performance, resolving conflicts and crisis, managing and mitigating risk, and capitalising on near and long term business opportunities.

Today’s business and economic environment demands keen market insights and experienced professionals. Navigant’s team of more than 1,900 professionals is equipped with industry experience and technical capabilities to assist our clients and provide valuable, real-world, practical solutions for addressing critical business issues.

We deliver four core services: Disputes & Investigative Services, Management Consulting, Economic Consulting and Financial Advisory Services. We focus on large industry sectors that are typically highly regulated and/or are undergoing significant change. Professionals across the world assist clients in the Construction, Energy, Healthcare, Financial Services and Public Sectors – driving change and transformation, ensuring compliance and optimising performance.

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STRICTLY PRIVATE & CONFIDENTIAL

Introduction

» Buy-to-let is a British phrase referring to the purchase of a property specifically to let out. As such, a buy-to-let mortgage is a mortgage specifically designed for this purpose.

» A let-to-buy mortgage is a new slant on buy-to-let that allows homeowners to let their existing home and buy another home elsewhere.

» The benefits for a buy-to-let landlord can include a stable income from rental receipts, as well as an accumulation of wealth if house prices go up over time.

» The main risk involves leveraged speculation where the landlord takes a loan to buy the property, with the expectation that the house can be sold later for a higher price, or that rental income will meet or exceed the cost of the loan.

» In the past two decades, many mortgage lenders have been willing to provide mortgage finance at attractive interest rates and mortgage terms. With schemes specifically designed for amateur and professional landlords, buy-to-let mortgages have undoubtedly stimulated the growth of the Private Rented Sector.

» Buy-to-let continues to grow given the increasing demand for property, increased size of deposit for home buying, low mortgage interest rates and the perceived lower return on alternative investment options.

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The Private Rental Sector

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Building and Social Housing Foundation (BSHF)

• The Private Rental Sector houses 16%

of households. Social housing is at 16% and owner-occupied housing at 68% of households.

• The Building and Social Housing Foundation (BHSF) has predicted that the private rental sector could account for

one in five households by around 2021.

• In recent years, there has been significant growth in economically active Housing Benefit claimants and in higher income working age households.

• Families now make up around one in six households in the private rented sector.

• Buy-to-let has an important role to play in the Private Rental Sector.


The “Amateur” Buy-to-Let Investor

» While there has been a significant increase in the number of BTL lenders and associated products, most of these are geared towards the small-scale, part-time amateur investor rather than professional landlords with extensive portfolios.

» This is not surprising, since the nature of these loans is fairly similar to standard residential lending and falls well within lenders

» According to the DCLG Private Landlords Survey 2010, 78% of all landlords only owned a single dwelling for rent, comprising 40% of the total private rented dwelling stock, while 95% owned less than five dwellings in their property

portfolio, accounting for 61% of the entire private rented housing stock.

» Only 8% of landlords were full time landlords.

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Buy-to-Let Mortgages “Perfect Conditions”

» 33,500 mortgages advanced to buy-to-let landlords in the first quarter of 2013 with a value £4.2bn

» There are now around 1.46 million buy-to-let mortgages in the UK, accounting for over 13% of the total estimated stock of 11.26 million mortgages.

» The latest RICS Residential Lettings Survey shows tenant demand is continuing to grow at a faster pace than new property becomes available. The gap between the two series according to the RICS appears to be widening

» As a result, it is no surprise that rent expectations remain positive. On average, the RICS expects residential rents to rise by close to 2% over the next twelve months.

» The Telegraph last week reported that

“Buy-to-let mortgage applications have soared by 26pc in the past year as landlords seek to take advantage of

the “perfect conditions” created by low interest rates and state-subsidised lending”.

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The Irish Experience………

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Buy-to-Let Mortgage Arrears Still Rising Steeply in Ireland

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• At end-December 2012, there were 150,344 buy-to-let mortgages held in the Republic of Ireland, to a value of €31.1 bn.

• Buy-to-let mortgages are

15.9% of stock and

represents 21.9% of

mortgage values.

• Of the stock of accounts, 18.9% were in arrears of

more than 90 days.

• Of the outstanding balances, 26.9% of all BTL mortgage accounts are in arrears of more than 90 days .


Buy-to-Let is Not Risk-Free

» “The continued growth of the UK buy-to-let (BTL) market could lead to weaker future performance of the sector, especially where lenders are targeting amateur and first-time landlords rather than professional investors”, Fitch Ratings says.

» BTL mortgages increased to 13.4% of total outstanding mortgage lending in the UK at end-March, up from 13% the previous quarter and 12.9% at the end of Q112.

» “The attractive returns on rental investments available today provides an opportunity for investors to beat the low returns from savings and other investments”.

» “However, we believe that reversion rates in the market, will make many investments unsustainable once interest rates return to more normal levels, leading to poor performance, particularly amongst those with little experience of managing an investment property in a stressed environment”.

» “Although BTL mortgage arrears have been low and repossessions subdued over the last couple of years, supported by a buoyant rental market and low interest rates, conditions are unlikely to remain so favourable for BTL in the longer term”.

» “When BTL cases are repossessed, losses against the property value can be substantially more than for owner-occupied property; typical discount on sale for BTL cases is around 50% higher than that on owner-occupied property”.

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The Risks of Buy-to-Let

» House Price Crash: for landlords who have geared themselves heavily with a low deposit and/or interest only mortgage

» Contagion: leverage between residential and investment properties and the interplay with consumers long-term plans

» Rental Voids: renters unexpectedly moved jobs and choose to live elsewhere for all sorts of other reasons, which may be a complete surprise. Even worse, if you fail to attract new tenants to replace existing ones, rental void periods can occur.

» Sharp Rise in Interest Rates: the global financial crisis has caused governments around the world to reduce interest rates to record lows. From this point, interest rates can only go up by mathematical certainty.

» Squatters/ Non Paying Tenants: an increase in the percentage of non-paying tenants.

» Tenants Damage Your Property: tenants don’t love landlord’s property in the same way in which homeowners may love their own house; dilapidation’s, accidents and breakages throughout the course of the buy to let investment property.

» Government Policy Changes: taxes can be introduced and/or reliefs reduced and/or eliminated.

» Regulatory Changes: new regulations can have cost implications for investors and/or lenders (therefore pricing)..

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STRICTLY PRIVATE & CONFIDENTIAL11

Marketing &

Acquisition

• Access to a holistic picture

of the customer through

Single Customer

View/CRM system

• Targeted marketing

focused on ‘suitability’,

segmenting customers

using flexible analytics and

modelling tools, backed up

with rich customer data

Product

Design

• Products demonstrably

satisfying a market or

customer segment need

• Sophistication level

appropriate to the target

customer requirement

• Profitable but not to the

detriment of the customer

• “Fair” open & transparent

charging structure

• Ongoing product reviews that

validate market, charging

structure, and profitability

Risk, Fraud, and Compliance

• Revised operational risk and credit risk models that are consistent with an FCA Conduct Risk environment

• Automated MI and audit trails of logic and supporting data to evidence suitability through the lifecycle

Customer

Relationship

Management

• Improved understanding of

customer needs throughout

the lifecycle using better

real-time customer data with

“softer information” on

behaviour and attitude

• Automated identification of

lifestyle events to prompt

suitability review

• Working proactively to

ensure arrears cases are

treated in a customer centric

and fair manner

Sales & Service

Distribution

• Enhanced decisioning

ensuring products match

latest customer needs

• Automated triggers/ alerts

for main servicing events,

driven off up to date

information

• Optimised channels

balancing customer need

with cost to serve

• Increased self servicing

through customer access to

supporting tools

All parts of the firm will need to change the way in which they view customers and demonstrate fairness and consideration…

Supporting Functions - Business Services, Technology Services, Finance, HR etc.

• Financial models that reflect the revised product/customer set and suitability based forward projections

• Remuneration model based on customer satisfaction, with roles in place to assure adherence to FCA Conduct Risk principles

The Mortgage Sector is under pressure as regulation is becoming wider and more intrusive. Conduct is the central

plank of regulatory change in Europe and the UK, including the Mortgage Credit Directive and the Mortgage Market

Review which focuses heavily on firm’s customer obligations


Conclusion

» Demand for rented property is high and is exceeding supply in most regions and good investment opportunities exist.

» Investors believe there are good returns on rents which seem to be on the increase. Furthermore, there is still a belief that in the long term they will make a capital gain as housing and lending markets become less rigid.

» Large amounts of capital have been invested in university housing and student demand is high despite increased fees.

» Against this backdrop, Buy-to-Let and indeed, Let-to-Buy, can be a good product for some but not all customers:

› The EC believes that a Buy-to-Let Mortgage is a product which carries a high risk for the consumer

› History has shown that housing is not a “one-way” bet – property prices can fall, as can rents

› Customers must understand the risks as well as the potential rewards.

» Lenders must put themselves in the shoes of those “amateur investors” for whom they are providing mortgages.

» Designing , on-going review, monitoring, governance and withdrawal of buy-to-let mortgages (if appropriate) to ensure they appropriately meet the needs of private rental sector investors is absolutely critical to ensuring the UK has a:

› viable long-term rental sector and

› sustainable profitable buy-to-let mortgage market.

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buy to let and let to buy misuse - cml conference_19 june 2013

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