Tips for buy-to-let landlords to benefit from new property market dynamics
I don’t think that the government’s meddling in the private rented sector over the last couple of years has had quite the effect the government was hoping for. I’m sure they wanted to look like the good guys to tenants and be paid for the privilege by higher tax returns reaped from landlords. It doesn’t appear to be working that way:
- As the demand for rental properties has continued to outpace supply, we’ve seen rents continuing to rise.
- Savvy landlords have found ways to restructure their property investments and mitigate higher tax liabilities.
Tenants aren’t happy, and buy-to-let investors aren’t happy. The latest buy-to-let mortgage news indicates that the new tax regime is deterring new investors, though JLL believes that the less favourable tax treatments have a “silver lining for tenants”.
Buy-to-let mortgage activity slumps
The number of properties being bought by landlords has fallen over the past two years, and the activity in the buy-to-let mortgage market fell by almost 20% in September 2018 compared to September 2017. The industry is blaming the fall on the regulatory and tax changes, though uncertainty over Brexit may also have dampened the market.
The latest figures from UK Finance indicate that just 5,200 buy-to-let mortgages we taken in September 2018, with a total value of only £700 million. Higher stamp duties, lower tax relief on mortgage interest, and tougher regulations appear to have taken their toll. With profits being squeezed, investors are shying away from making new buy-to-let purchases.
UK Finance is now predicting that total buy-to-let lending will reach just £9 billion this year. At the start of 2018, it had predicted £12 billion of lending in the sector.
The fall in the number of buy-to-let investments is having a negative effect on the private rented sector (PRS) – fewer properties coming to the market mean that demand remains unsatisfied, and when demand outweighs supply, rents tend to rise. (Good news for buy-to-let investors, of course.)
UK housing has a bright future, says JLL
JLL also believes that the tax and regulatory changes have dampened the role of buy-to-let investors in the PRS. However, it forecasts a bright future for UK property. While this should boost confidence in the buy-to-let market, JLL also believes that the PRS is evolving away from private landlords.
Despite a reduction in the new supply of homes in the PRS from the private landlord, JLL expects that institutional investors will breach the gap, evolving the market away from private buy-to-let investors.
Adam Challis, Head of UK Residential Research at JLL, said: “Government initiatives have unwittingly caused a step change in the rental market, sparked by a decrease in uptake of buy-to-let mortgages by individual landlords, put off by muted house price growth and lack of financial incentives.
“This gap in the market is accelerating investment by their institutional counterparts, providing tenants with a new reality when it comes to renting – one where they are less exposed to ‘amateur’ landlords and more likely to be dealing with a well-organised corporate entity with a real commitment to tenant service.”
How will the evolving market affect buy-to-let investment returns?
JLL predicts a phase of affordability with a rise in confidence. It expects this to start in London and the South. It expects the spur will be a Brexit deal agreed by Parliament. This, it says, will lead to an improving economy in 2019 and beyond, flowing through to higher wages and a more buoyant property market. This, it says, will boost:
- UK housing transactions to 1.15 million in 2019 and 1.32 million in 2023
- Average UK property price rises of 11.4% in the next five years
Perhaps the biggest question for tenants will be whether the evolving PRS will put downward pressure on rental prices. My suspicion is that it will not. Institutions invest to make money for their client investors. They won’t be enthusiastic to put downward pressure on rents.
As we discussed a few weeks ago, rents are rising faster than inflation and savvy landlords are expanding portfolios. Institutional investors may bring more professionalism to the PRS, but they will also charge appropriately for the ‘added value’ that they bring.
How can buy-to-let landlords compete in the evolving PRS?
So, this brings me to the burning question of, how can buy-to-let investors benefit from the evolving PRS?
Here are my four top tips:
- Invest wisely in locations that benefit from good property fundamentals (shops, schools, transport links, major employers and major investment)
- Use a mortgage broker to get the best mortgage deal
- Structure your investment to take advantage of appropriate tax benefits (e.g. with a spouse or by investing as a company)
- Compete with institutional investors by using professional, experienced investment property managers to manage your property
Whatever happens with Brexit, there will still be high demand for rental property in the UK. If JLL is right and wages continue to rise faster than general inflation, then there will be room for landlords to increase rents accordingly. This will boost income from buy-to-let. JLL is also predicting that property prices will rise over the next five years. So there are capital gains to be won, too.
By investing in the best locations and having your buy-to-let managed professionally, there is no reason why you shouldn’t compete on the same level as those institutions with big pockets. Grab hold of their coattails, and benefit from the evolving PRS is my advice.
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