Tim Hassell, Managing Director at Draker Lettings
The recent change in tax laws regarding mortgage interest payments have resulted in a growing level of uncertainty in the buy-to-let sector, especially among landlords. It is common knowledge that landlords and agents have benefited dramatically over the last ten years primarily due to the credit crunch. To understand the direction that we may be headed I often find it useful to understand where we have been and indeed where we are now.
Where we are coming from
It has become almost impossible for most people under the age of 30 to buy their own property unless helped out by a parent or relative. Deposits required are much higher and multiples/proof of earning criteria are tougher and more heavily enforced. This has meant an influx in tenant numbers with many more young people forced into renting rather than buying, especially in prime central London.
Whilst tenant numbers have been increasing in London and the South East there has also been a dramatic increase in the amount of investment into the buy-to-let sector with a majority of new builds being sold to both domestic and overseas buyers solely as rental investments. UK buy-to-let property is now a major global asset class and I believe that we will see many more institutional investors joining the market, especially in Central London where there will be an abundance of new build properties.
The only big drawback for landlords in Central London over the last few years has been a fall in rental yields. This has mainly been brought about by a dramatic rise in property values (entry price to buy-to-lets has risen), a larger number of properties being brought to the rental market and very few landlords selling and leaving the market (due to low interest rates it has been very cheap to hold property as an asset).
Over the last decade everything has on balance been very rosy for landlords. Until now…
This year we have seen a rise in stamp duty for buy-to-let investors. Next year landlords will only be able to offset 75% of their mortgage interest payments against income along with the removal of the 10% “wear and tear” allowance. This percentage will then decrease annually by 25% until it reaches 0% in 2020.
This is not great news for those investors who are heavily geared and rely on their rental income to run their property/portfolio in the short term. For those with high gearing and no other viable income to cover the shortfall they will be pushed into negative cash flow. As the reality of these changes start to loom closer many people will be forced to sell out of the market.
For those landlords who are not over geared and taking a long term view on the market things will likely get much better over time. I predict that provided the tax change actually happens a good 10-15% of Landlords will sell out of the market over the next two years. This combined with an ever increasing tenant base (for reasons mentioned above) will ensure that supply and demand shift very much in favour of Landlords.
Rents will go up and yields will subsequently rise. Combine a higher yield with possible buying opportunities in a softer sales market and you have a combination of cash rich landlords buying from those who are over extended and the next generation of rental investors coming to market.
This next step is of course all dependent on the tax changes to mortgage payments actually taking place. There is always the possibility that this will repealed in the not too distant future…
Lynsey Schipper, Head of Lettings at Lurot Brand
The reality for the buy-to-let investor is to be able to invest long term. Given that initial yields are currently sub 3% in prime central London, long term capital gain should now be the focus for landlords rather than the currently achievable headline rents.
Any would-be landlords should carefully factor in longer void periods which are now more typical than traditionally calculated by lenders due to the over-supply in the immediate market; albeit void periods are avoided by accurate pricing and the best possible presentation. If in doubt ask a trusted agent for the best advice – ideally not on their own sale stock!
Buy-to-Let Property Presentation
It has now become imperative that investment properties are presented in first class condition and in a style that will generate the widest possible market appeal. In particular, I would advise landlords that the photographs of the property need show the maximum light and space available and emphasis that the property is contemporary in design. Decisions are made via images and floorplans on line these days, an understanding of the two dimensional image of the property is vital.
The irony of this is, of course, that tenants less willing to be guided by their agent miss out on the best properties which are often let before going live on line.
London rental property will always be a sound investment. However anyone entering into the market currently should be aware that their expectations of asset performance should be adjusted to a long term incremental return, rather than the creation of a secondary income stream.