BTL threat to banking profits

Fund manager George Luckraft is predicting there could be an imminent rise in the number of unsold or vacant buy-to-let properties, which will in turn make banking stocks less attractive as an investment.

Speaking earlier this week at the Axa Framlington Live roadshow in London, Luckraft – manager of the Framlington UK equity income fund – said while UK banking shares had in recent months contributed strong income gains, the housing market could yet see a “wobble” created by overcapacity of buy-to-let properties and alongside a rise in the number of bad debts, and this could in turn affect the profitability of UK banks.

More specifically, he suggests while the housing market has seen a relatively ‘soft’ landing in the last few months, banks could begin to feel the pressure of buy-to-let lending as he predicts there will be an increase in the number of ‘off-plan’ property deals which go uncompleted by the original buyer, as well as an increase in the number of properties which fail to make sufficient rental revenue.

Luckraft pointed out he his long-held view is recent growth in buy-to-let properties may be a poor investment – preferring to label them as “buy-to-regret” – where

“The banking sector saw pure signs of life, thanks to the soft landing in the housing market. There are still significant risks [in buy-to-let], particularly with the large number of flats to rent in areas such as London,” according to Luckraft.

“The average price is still 5% below value, and the growth of amateur landlords focuses on location, location, location, rather than the practicalities of an investment. I suspect we could see a lot of [offplan] investors not completing on the deal, and returning the keys, which could then produce a wobble in the market,” he continues.

His focus on BTL investments was part of a wider presentation which reveals the Framlington UK equity income fund may reduce its 12% portfolio holding of banking stocks, as Luckraft anticipates there will also be a rise in personal bankruptcies alongside potential lending defaults by private equity investments.

“The banking sector has, so to speak, had seven fat years and now has seven thin years to come. Last year, there was £250m raised in private equity, but if you gear that up, there will be a £1trillion lent in private equity. Increased leverage under a tougher regulatory environment means the banks are taking on bigger risks, and there could be some significant bad debts to come. That said, there are some gains to be had [in banking],” adds Luckraft.

Further analysis of the portfolio indicates Framlington may move further out of utilities and tobacco stocks – which were also key holdings in the Framlington equity income portfolio – in preference for commodity-related services and telecoms giants such as Vodafone, which is now back in favour with potential investors.