It may have begun with the 2014 press reports of the buy-to-let (BTL) millionaire Fergus Wilson’s eviction of tenants receiving housing benefit. It kept rolling with reports of his banning ‘coloured’, single mothers, workers on zero hours contracts, and victims of domestic abuse. Finally, Britain has a despised landlord figure to match slum landlord and racketeer Peter Rachman.
That’s helped to create a climate in which BTL landlords have been held responsible for the housing crisis, and in which a Conservative government – normally considered the landlord’s friend – piled on the punishment. First up was higher stamp duty on second properties, then the removal of tax allowances for mortgage interest. Almost all political parties now present ‘tenant-friendly’ policies regardless of the impact on landlords, while the Scottish National Party proposes banning BTL mortgages completely.
THE BIG QUESTIONS
This all raises two big questions. First, does the government really hate the BTL landlord? Secondly, does the government realise the impact these changes could have on the housing market – and the fact that they might exacerbate the housing crisis rather than solve the problem?
The Government may hope that institutional investment in ‘build to rent’ blocks will ease pressure, we’ve seen little evidence of this in the past. John Heron, Paragon.
John Heron, MD of mortgage lender Paragon, thinks the tax changes bought into a “rhetoric directed at levelling the playing field” between landlords and first time buyers. In fact, he says, the evidence shows that landlords and first time buyers are rarely in competition for the same property. But he says George Osborne, as Chancellor seems to have been more negative on BTL than the current government, which appears to have a more nuanced view.
Tarlochan Garcha of peer to peer lending agency Kuflink, believes the measures against BTL landlords were simply opportunistic. “My view is that the previous government thought it was losing out on a lot of revenue particularly from amateur landlords;” he explains, “they were trying to bridge the funding gap at the Treasury. What they didn’t realise was that we have a big supply and demand issue with a lack of affordability.”
There’s also the interesting fact that the assault on BTL was led not by the Housing Minister but by the Treasury. Although a 2015 survey by the Chartered Institute of Housing showed 75 per cent of respondents believed there was a housing crisis, no government in twenty years has made housing a major focus of its policies or given much real power to its Housing Minister.
Fareed Nabir of the online letting agent Letbritain says, “The fact that the country has recently welcomed its 15th Housing Minister since the year 2000 does little to help” what he characterises as “a historically haphazard approach to rental policy.”
Unfortunately, whether or not the government intended to shut down the Private Rented Sector (PRS), tax hikes and increasing regulation have had consequences. Tighter mortgage lending rules were introduced last year – with rules for larger portfolios tightened up further in September this year, putting further pressure on landlords’ ability to finance fresh acquisitions.
John Heron worries about “the unintended consequence of reducing the supply of new property into the PRS and putting upward pressure on rents,” but the ripple effect could lead to a negative impact on the entire housing market.
The latest figures show that the market is definitely cooling. Nationwide subsidiary TWM says its total BTL lending fell from £2.2bn in the third quarter of its 2016 financial year to just £0.9bn this time round – that’s a massive cut. For the market overall, the Council of Mortgage Lenders expects the value of BTL lending to dip from £40bn lent in 2016 to £35bn this year and £33bn in 2018, with the number of transactions falling even more precipitously.
The further tightening up of lending criteria could damage the market more than expected, since it may force some lenders to trim their new loans or even drop out of the market completely. John Heron says “as a buy-to-let specialist, we’ve been quick to adapt, but not all lenders are necessarily going to be comfortable with the more specialist underwriting required for portfolio landlords.”
For some landlords, moving to a corporate model has allowed them to keep the tax allowances on mortgage interest, though they still have to stump up the extra stamp duty.
Of course, there are costs involved in the move, as stamp duty and capital gains tax are payable on the transfer; and it’s not always easy to get finance for companies, which is generally priced at a premium to mortgages for individuals. Mortgage broker Private Finance reckons the move is only sensible for landlords with portfolios of four or more properties; smaller landlords will just have to bite the bullet, and could see their annual income fall by £1,000 a year or more.
A study by the British Property Federation earlier this year put sales to BTL investors as high as 60 per cent of new property sales in London and 30 per cent in other areas. This isn’t important just because it’s a high percentage of the market; developers of major projects use BTL sales as a means of de-risking the development by getting cash up front. If the BTL market dries up, developers are either going to have to take more risk – which the historic record shows is unlikely – or they’re going to slow their development schedules. That could mean even fewer housing completions, and even less property available for first time buyers, which is exactly the opposite of what George Osborne presumably intended.
Government has said it supports the evolution of an institutionally funded build-to-rent sector, and the conclusion might be drawn that it means to do so at the expense of BTL. The white paper published this February states that “the private rented sector is important”, but it focuses on build-to-rent almost exclusively.
Legal & General’s BTR scheme in Walthamstow: 440 homes on a former industrial estate, with cafes, work spaces, and communal leisure spaces.
However, looked at in detail, the paper doesn’t do much for institutional investors either. There are a lot of nice words about, for instance, how pooling of local government pension funds ‘could support’ new building, and how to ‘encourage’ developers, but there’s almost nothing new; the £3.5bn PRS Housing Guarantee Scheme and £1n Build to Rent Fund were announced several years ago, and in any case, they only provide loan finance on quasi-commercial terms, so while they make access to finance easier, they don’t change the basic economics. While the Government says it wants big investors, it hasn’t exempted them from the three per cent surcharge on stamp duty, nor has it come across with the zero-rating VAT break the BPF has been asking for.
John Heron is sceptical. “Whilst the Government may hope that institutional investment in large-scale, ‘build-to-rent’ blocks will ease supply pressure, we’ve seen little evidence of this in the past,” he says. “In the UK, as in most other countries, it’s the army of private landlords that form the backbone of an effective PRS.”
However, build-to-rent has been quietly rolling on, and increasing the number of schemes in development significantly. Some big names are involved; Legal & General increased its original investment to £1bn in December 2016 and has built 1,000 homes so far, while housebuilder Telford Homes currently has 10 per cent of its portfolio in build-to-rent and wants to increase that to 50 per cent. Perhaps that’s not surprising – it can sell forward whole blocks of homes to investors, helping its cash flow and funding the construction process without bank debt.
According to BPF figures, 5,000 properties are under construction in Manchester, and over 6,000 in London. However, compare that to a RICS calculation that the country has a shortfall of 1.8 million rental properties, and you can see there’s some work to do. The BPF and Savills suggest build-to-rent could deliver 240,000 homes by 2030 – still less than a quarter of the way to solving the problem. In backing build-to-rent and corporate landlords, the government is effectively choosing 2 per cent of PRS landlords, who currently own less than five per cent of the total value of properties in the sector, to take things forward. The other 98 per cent of landlords, the ones who own fewer than ten properties, may not be financing new rental right now – but it might be worth seeing if their efforts can be focused in the right direction, rather than suppressed.
Where build-to-rent seems particularly weak is in its reliance on large apartment schemes. BTL landlords are responsible for a diverse portfolio of properties ranging from Victorian terraces to small family homes and HMOs; build-to-rent seems to be offering mainly apartments aimed at millennials with higher incomes, with little for families or low income groups. That may change as the sector matures, but currently, it’s difficult to see build-to-rent being able to replace BTL as the main motor of the private rented sector. Besides, it’s a model that seems to have been applied almost exclusively in major metropolitan areas; will it work in smaller towns? The economics suggest not; the scale of development needs to be significant to get the cost savings required both on construction and on management costs.
It’s instructive to contrast the UK with France, where successive schemes from the loi Malraux in 1962 to the more recent Pinel, Scellier, and Duflot laws (named after the ministers who brought them in) have established tax break schemes specifically to encourage individual investment in the rental sector. French finance magazines often show family finances including one or two rental properties as part of their investments; it’s considered quite normal.
However, the state ensures that the tax break is ‘paid’ for by the investor. These schemes have often included quite tight restrictions on rental levels and the location of properties, as well as insisting on long holding periods, and generally they have rewarded only new investment (or, occasionally, refurbishment) rather than the purchase of existing properties. 2009’s Scellier programme, for instance, was focused on particular areas of the country where there was high rental demand, imposed (admittedly quite high) maximum levels of rent, maximum income for tenants, and a minimum nine year letting period. That ensures no one tries to use the tax break for ‘flipping’. Add to that a 30-year period to gain complete freedom from capital gains tax, and a three year minimum tenancy, and you can see how France has ended up with stable investment from long term private landlords, plus giving developers a market for large developments.
A NEW FOCUS
Tarlochan Garcha believes the Government needs to be much more hands-on, and should encourage landlords to invest in new properties in certain areas of high demand – Birmingham (“you know, there are more cranes nowadays in Birmingham than there are in London!”), Oxford, Manchester, Liverpool, and London. “It needs to be micromanaged,” he says. But it also needs to link up landlords’ money and developers’ nous; few landlords have any skill in property development, and developers won’t take a risk unless they have a good feel for how it will sell.
The Government thought it was losing revenue from amateur landlords. It didn’t see the supply and demand issue and the lack of affordability. Tarlochan Garcha, Kufflink.
Focusing landlords on new building is one way forward; another is encouraging refurbishment projects – and this is somewhere that individual BTL landlords can make a difference.
Paresh Raja, of bridging finance provider Market Financial Solutions, says there are an estimated 1.4 million homes currently unoccupied in the UK. “It would make sense for the Government to encourage investors to bring these onto the market through refurbishment projects, easing the financial pressures faced by first time buyers in particular. This is the type of creative thinking we need to see.”
Another possible model is the Business Expansion Scheme. In 1988, BESs were allowed to buy residential property. That didn’t revolutionise the BTL sector, but it created the student housing model that’s become so successful today. Creating a similar scheme would enable individual investors’ funds to be pooled in order to gain the economies of scale of larger developments, and would also allow a professional management company to be used. Tax breaks along the lines of the Venture Capital Trust – an initial allowance against income tax, plus freedom from tax on dividends and capital gains – could be used to prime the pumps, and unlike the pure build-to-rent model, with such vehicles the government could quite legitimately insist on a proportion of affordable housing.
Unfortunately, there seems little political will for imaginative solutions involving buy-to-let. Labour has promised a housebuilding programme of a million homes, but that will depend on government funds; meanwhile, private landlords will be further discouraged by the requirement for registration. BTL landlords look to be suffering the death of a thousand cuts, and there’ no end in sight.
Back in July 2016 the Bank of England warned in its financial stability report that a shock to BTL could amplify problems in the housing market. That’s one reason behind the tightening up of lending criteria. Ironically, that tightening of credit might be the straw that breaks the camel’s back, and sends the housing market as a whole into reverse.
It seems a great pity that twenty years of BTL growth is now being put at risk. BTL landlords have shown they’re willing to invest their money – a smart government would put that money to good use, financing development of new rental housing, instead of just trying to cream a percentage off the top.