Buy-to-let blow for leading house builders

Declining confidence in the buy-to-let housing market and the Chancellor's move to prevent pension savers buying residential property could hit leading housebuilders in 2006, City analysts said yesterday.

John Messenger, an analyst at Morgan Stanley, said: "Housebuilders have produced more and more flats in recent years and the buy-to-let market has grown to meet that supply - now it looks as if that demand may not be there next year."

The warnings follow the decision by Portman Building Society to stop offering buy-to-let mortgages on newly built properties. The society said it was concerned many housebuilders were doing deals with investors in order to help them get round mortgage providers' reluctance to lend more than 85 per cent of the purchase price of buy-to-let properties.

Although Portman is a relatively small player in the buy-to-let market, the move reflects growing concern about yields in the new-build sector.

The Morgan Stanley analysis suggests most investors are now relying on house price growth rather than rental income to make a positive return on their properties, but outside London the value of new-build housing has fallen this year.

The biggest buy-to-let mortgage lenders - Birmingham Midshires, Bradford & Bingley, Northern Rock and Paragon - have all said they will con- tinue to lend to buy-to-let investors who meet valuation and credit criteria.

But Morgan Stanley warned that housebuilders with the largest exposure to the new-build sector outside the London market, including Barratt Developments and Wimpey, could face a slowdown in 2006. "The industry will see margins fall next year," Mr Messenger warned.

Demand for buy-to-let property will also be reduced by Gordon Brown's U-turn on pensions. On Monday, Mr Brown said he would not, after all, allow savers to hold residential property in self-invested personal pensions (Sipps), despite consistently promising to introduce tax breaks next April.

Rachel Waring, an analyst at Numis, said: "The Chancellor's U-turn on Sipps could be an even bigger issue because many people have been banking on putting property into a pension next year and that demand will now fall away."

Ms Waring said property developers with a specific focus on urban flats, such as City Lofts and Telford Homes, would be hardest hit by the Chancellor's decision.