DBPR asked London property experts about the best places to invest in a buy-to-let property in London and what are the consequences of recent changes in stamp duty, mortgage interest relief and the right to rent legislation…
Lynsey Schipper of Lurot Brand
“Locations that have a large indigenous population of long term renters unlikely to wish to buy, such as students – therefore university towns are an excellent choice. The North and North East continue to provide excellent returns due to the density of population, low incomes and universities. Locations that offer reliable transport links into central London, ideally within the ‘golden hour’ preferred by commuters, will consistently attract tenants, and therefore ultimately prove to be a good rental investment. I would also suggest that the inclusion of a tube line has become increasingly important to tenants and buyers alike given the poor service and astronomical cost of rail travel.
I live in Zone 6 – which I had not previously realised existed – and it takes 30 mins to get to Liverpool Street direct on the tube. The prices are now crazy, apparently valued at similar pricing to Zone 3 on the basis that the quality of schools are generally better, there are prettier areas, and despite what people think there is very little difference in journey times. A good quality four bed will now cost you £1.5m +. The lettings market in this area for the same reasons is also exceptionally fast, good quality stock is snapped up with hours for similar rent levels as achieved in Zone 2, not least because arguably a lot of the indigenous local population is being priced out of the market as London grows bigger.”
Richard Bryce of Aston Chase
“From a lettings perspective there are two notable consequences to the adjustment in stamp duty thresholds. Firstly, we are finding that there are more prospective tenants searching for homes at the highest tier of the lettings market. We are currently working with several families actively searching for luxurious homes who are working with budgets in the region of £15,000 – £20,000 per week for properties such as Hamilton Terrace and St Johns Wood Park .
The second consequence of the change in stamp duty thresholds is that owners who initially intended to sell their homes are now also marketing their homes to rent. Increasingly referred to as ‘accidental Landlords’ these owners are either intending to let for a shorter period of perhaps one to two years before re-marketing for sale, or in some cases seeking a rental income while continuing to market their properties for sale.
The early indications are that 2016 will be a productive year for lettings, and while we expect more property to be brought to the lettings market as a result of a challenging sales market we expect that the increase we have seen in terms of the numbers of prospective Tenants actively searching for property will ensure that rental prices will not be dramatically affected
Mortgage interest relief: As a consequence of the legislation changes Landlords will no longer be able to deduct the mortgage interest from their rental income before calculating how much tax they should have to pay. The change in legislation was brought in as buy-to-let Landlords were seen to be gaining a sizeable advantage over owner occupiers. How this change in legislation will affect the residential lettings market in central and north west London is as yet to be seen but with the adjustment of the stamp duty thresholds and increasing numbers of prospective Tenants searching for homes we would expect that rental prices would perhaps only be nominally affected within the North West and Central London area.
Right to rent: Under the new rules, landlords are now obligated to check the right of prospective non tenants to be in the country. How this will affect rental prices remains to be seen but notably a tenancy agreement will need to be tailored to reflect the term of a prospective tenants visa, with Landlord break clauses included within an agreement to coincide with the end date of a visa.”
Rory McGougan, Director of Hanover Private Office
“The government’s introduction of a gradual exclusion of mortgage interest relief and increases in stamp duty land tax is designed to slow down the level of investors in the market to allow a greater number of first time buyers and owner occupiers to purchase. It is, despite criticism, a way of not only slowing capital value increases in the market that outprice many buyers, but also reducing the population who are over extending their financing arrangements. In many ways it is positive, in that it will slow down the market and hopefully bring a period of gradual and sustainable growth. It will also reduce the increasing rental values in the private rented sector, which on its own reduces the chances of a first time buyer purchasing their first home as they are unable to save.
For the domestic investor, the figures for an investment with 75% LTV financing will no longer make sense. We have already started to see institutional investors looking for opportunities in the market where distressed landlords are looking to offload due to almost negative yields in some instances. Hanover Private Office have already been approached by institutional investors to source real estate directly from domestic investors wanting to exit from their investment – we are also able to offer management packages to these investors as well. For any domestic buyers buying cash the only difference is the stamp duty – which at 3% shouldn’t be enough to stop the majority investing in what is a long-term investment in a portfolio, (which property should be). Then investors with lower leverage on their property will also be less affected as their interest payments are lower due to the LTV ratio. Ultimately it means that the market should become more balanced and there will be less opportunity for repossessions due to over stretched investors. The rental market will also start to balance out, with fairer prices for tenants.”
Simon Deen of Aston Chase
“It’s no secret that capital growth is set to be compressed over the next few years. In London there are many new buildings which are set for completion in 2016, where there are still units available to purchase. Rather than buying off plan for delivery in 2017, 2018, I think that the smart money will be buying now for delivery in the next six months, at which point buyers can immediately start to benefit from a rental income. Whilst not being totally bullet proof or immune to an economic downturn, I do believe in the strength of the London market, and there are still areas in Zones 2 & 3 which I believe will deliver a combination of good yields and capital appreciation. PCL may be fully priced, but the main advantage of the ‘ripple effect’ of the last 5-10 years is that London has become less area driven and more property focussed. If the offering is right, there aren’t many locations that buyers should be afraid to invest in, and over a 5-10 year period you will see growth.
Everything is a function of price. Whilst George Osbourne has introduced measures to try and cool the market, and a combination of geo-political and economic issues have helped him, the volatility in both the stock market and commodities will I believe push people back to the safest asset class of them all – bricks and mortar. Purchasers are both fully aware of the breadth of choice that they have when buying an investment property in a new development, so it’s those developers who are most in tune with the market who will sell their stock first. I don’t have numbers, but I believe that there won’t be many changes – those who are minded to buy an investment property still will, and any price change will have to be swallowed by the developer.”