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Does buy-to-let still stack up?

The media says buy-to-let is crashing down, but, says Kate Faulkner, let’s look at the facts and figures.

Kate Faulkner
The reality is that although the government and tenant groups may want to reduce the number of individual buy to let landlords in favour of institutional Build to Rent, there is no way I can see that this stock will fill the void left by landlords leaving the market.

Remember, the huge growth in rental market was never supply driven, it was demand driven – by successive governments. The Conservatives, in the 1990s, wanted to reduce dependency on social housing; Labour drove students into higher education, we have seen a huge growth in migration. These policies caused the growth of the Private Rented Sector (PRS). Coupled with a lack of homes in all tenures, this meant prices rose and, as a result, additional growth came from areas where people can’t now afford to buy.

DEMAND

All landlords have done is respond to this demand and that appears set to continue – whether the government wants it or not. Knight Frank’s ‘Multihousing 2017 PRS research report’, says the proportion of households living in the PRS has doubled in the last 10 years, it is expected to continue to grow: “The proportion of households in the Private Rented Sector will rise to 24 per cent by 2021 and some 68 per cent of renters still expect to be living in the rental sector in three years’ time.”

SUPPLY

The CML says, “We have revised down our forecast for buy-to-let lending. We expected to see £38 billion in 2017 and 2018. Now, we expect £35 billion in 2017 and £33 billion in 2018”. So from a mortgage perspective, tax increases appear to have reduced the number of landlords coming into the market.

If agencies want to retain and build buy-to-let business they need to work closely with investors.

Although some have predicted a mass sell-off, in a quarterly survey that I carry out for Belvoir offices, they report a large rise in rents, mostly in market towns, but normal falls and rent rises elsewhere. Talking to market town agents, it appears the large rise in rents is partly down to a lack of new landlords bringing new stock to the market, due to the tax changes. As a result, properties are now being rented to the highest bidder, typically the wealthier tenant, raising rents beyond the traditional +/-4-5% trend.

Across the country though, Belvoir reports that, “The average number of offices seeing landlords add 6-10 properties appears to have declined when compared to Q2 2016 (15 vs 10.9 per cent) although offices with landlords buying up to three properties remained static.

“The number of landlords selling property has fallen since Q2 2016, suggesting that we are not yet seeing the predicted ‘landlord sell off’ post the new tax increases, but we are seeing a drop in new landlords entering the market.”

THE AGENT’S ROLE

If agents want to retain and build buy to let business, they need to be very hands on with investors. Existing landlords need to be reassured that buy to let is ‘not dead’ and can still offer good returns, particularly if they invest with cash and/or have been investing for some time.

The first thing is to assess the impact of the mortgage relief changes and create a plan to mitigate them. From a profitability basis, Shawbrook have published an in-depth report on the Buy to Let Market, including the impact of the mortgage tax relief reduction for higher rate taxpayers, showing that a BTL investor collecting a rental income of £5,000 per month and mortgage interest payments of £4,000 per month profits could drop from £600 per month to a loss of £200.

If it’s possible to raise rents over the coming years, that’s one way to compensate, as is checking the landlord is on the very best mortgage deal that allows them to make a profit, or pay down some of the mortgage lending over the next few years.

It is still worth agents encouraging and leading the way for landlords by calling on their local MPs to reverse the mortgage interest relief changes; stop any new rules and regulations to allow existing ones to bed in and also, for those that wish to, allow properties to be moved into a company without Capital Gains and Stamp Duty costs.

Agents need to step up a gear, not just letting property but proactively account managing and guiding landlords on ways to mitigate the tax hikes and offer reasons to hold onto their investment. This is essential if letting agents are to avoid the potential double whammy of falls in stock to let and loss of agent fees in England.

Knight Frank report: https://kfcontent.blob. core.windows.net/research/707/documents/ en/the-uk-tenant-survey-2017-4743.pdf

Shawbrook: https://www.shawbrook.co.uk/ media/234003/BTL-Report-2017.pdf 

September 27, 2017

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