Buy-to-let investors have taken a real hammering this year. The reduction in tax relief for higher rate taxpayers with a buy-to-let mortgage will significantly reduce the net yields. The cost of complying with legislation increases all the time.
More and more local authorities are talking about bringing in licensing schemes for landlords which would involve yet more compliance costs.
And if that wasn’t enough, the Government has now decided to help itself to the equivalent of the first eleven months’ rent for all new buy-to-let purchases through the mechanism of an extra three per cent levy on stamp duty.
So what is the government trying to achieve and what will the consequences be for landlords and letting agents? In my opinion, all this anti-landlord legislation has not happened by accident. It is a deliberate attempt by government to deter amateur landlords and encourage more institutional investors to enter the lettings market.
Landlords may insist that their agents use primary tenancy contracts, making the agent legally liable.
Even though I am a landlord myself, I have some sympathy for what they are trying to achieve. The fact of the matter is that many landlords who own just one or two properties are not very good landlords. Their properties are in poor condition and they don’t have the capital available to improve them. They are often slow to carry out essential repairs and penny-pinch over the cost of doing so. They often retain tenants’ deposits unfairly and despite legislation, they often get away with it. I could go on. The government would, I am sure, far rather see big institutional investors take over the marketplace.
The student market
A taste of what is coming can be seen in the student letting market. One of my clients in a big northern city told me that ten years ago, all the students lived in rundown Victorian flats and houses owned by individual landlords. Now, a high proportion of them live in modern purpose-build student accommodation owned by specialist investment companies.
The owners of the Victorian properties that they used to rent have been hit very hard. Some have improved the quality of their properties. Some have dropped their rents. Despite this, over 2,500 bedrooms were empty this year.
We have already started to see the first signs of this happening in the buy-to-let market. Shepherd Direct, which owns Century21 UK, has recently announced that they have won a contract to manage 10,000 new build-to-let homes which will completed over the next five years.
Another of my clients has just won a contract to manage over 3,000 properties for a single investor. There will inevitably be more such deals as institutional money is finally invested in the buy-to-let sector.
Impact on landlords and agents
So what does this mean for the small landlord and the small letting agent?
Well, it seems inevitable that landlords will need to become more professional. They will need to improve the standard of their accommodation and they will need to be more observant of legislation. If they don’t, then market forces and the regulators will force them out of the market.
It also seems likely that smaller landlords may start to own their properties through funds rather than directly. The new tax regulations favour companies that own more than fifteen properties. Perhaps landlords will get together and buy a one-fifteen share of fifteen properties rather than 100 per cent of a single one.
With regard to the increasing regulations, I would not be surprised to see landlords asking their agents to use primary tenancy contracts. These mean that the agent, not the landlord, is legally responsible for compliance with all regulations.
Letting agents will also have to raise their game in order to comply with increasingly complex regulations and may have to start declining properties that are not of a suitable standard.
Independent agents will also need to change their marketing tactics in order to win instructions from investment funds and professional landlords rather than relying on accidental landlords and single property landlords.
I fear that the forthcoming changes in the market will favour the larger agents and may be yet another factor in the rapid consolidation of the lettings industry.
Adam Walker is a management consultant, business sales agent and trainer who has worked in the property sector for more than 25 years.