Landlords of the future
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Britain’s investors have been remarkably resilient in recent months. Radical policy changes and slowing price growth mean it’s easy to be downbeat about the prospects for buy-to-let. Despite the introduction of the 3% stamp duty charge for second home buyers and the prospect of less generous rules on tax relief, investor activity levels in late 2016 were nearly back to normal.
Understanding the makeup of the sector, why landlords invest and who they are starts to explain why we’ve seen the industry weather external factors better than forecast. For many landlords their property is a long-term investment, the average investor-owned home is only traded every 17 years, meaning for many the payoff is in long-term capital appreciation. For those more yield focused, even incomes which are under pressure from rising house prices and less tax relief, compare favourably to the yields on savings accounts, government bonds and even the FTSE 100 index. While of course past gains are no guarantee of future performance, sustained house price growth over the last 25 years is a seductive draw for many.
Our research shows that landlords are changing their behaviour, both in response to recent policy changes and longer term trends. Landlords are much more likely to own more than one home than they have been in the past, perhaps a sign of the sector maturing. Investors purchasing new properties are also more likely to use a company. Where and what landlords buy is changing too, in part in line with the housing market cycle but also in search of higher yields.
It seems that many landlords will weather the current choppy waters, changing to adapt to the new environment. This means we still expect the size of the rented sector to grow in the coming years. Fewer investors owning more stock looks likely, as does the growth of the build-to-rent sector. The structural shift in economic and housing forces driving the expansion of the rented sector are unlikely to change, meaning the demand will likely be there for growth.
More people paying more stamp duty
The 3% additional stamp duty charge for second home buyers is raising much more than forecast by the government. £1.2 billion since its introduction, twice what was originally envisaged for the full year by the Office of Budget Responsibility following the policy’s announcement in the 2015 Autumn Statement.A bumper
A bumper take from stamp duty means more of the market has been affected than expected. Our analysis of sales data shows a quarter of transactions could be caught by the charge in 2017.
Only 60% of those paying the extra 3% stamp duty are investors, the rest are home owners who have not sold their main residence (21%), second home owners (9%), small developers (8%) and those buying with a child or family member (2%).
Some first-time buyers and owner-occupiers have won out against investors because of the new charge. Since its introduction c.9,000 fewer people buying their first home lost out to a landlord than over the same period during 2015. This compares to the 31,000 owner-occupiers paying the charge.
Landlords adapting to a changing environment
With the prospect of the tapering of tax relief on mortgage interest, more investors are choosing to buy properties using a corporate envelope. Fourteen percent of investor purchases were made through a company in 2016, a record high. The number of multi-property landlords is growing too, Council of Mortgage Lenders data shows that multi-property landlords have grown from 22% of the market in 2010 to 37% today.
Landlords are most likely to choose to invest, rather than become a landlord by accident. More are now looking further and wider afield for a better yield and capital appreciation too. The proportion of investors buying a buy-to-let property in the same local authority where they live reached a record low of 54% in 2016, down from 60% in 2010.
Are the returns still there?
Prior to the 2014 stamp duty reform, the average UK landlord paid £161,550 for a home and faced a stamp duty bill of £1,616. When the slab structure was abolished, this fell to just £731. However, the new stamp duty surcharge now means that the landlord would face a bill of £5,578 – a 663% increase.
The changes being made to the mortgage tax relief and the removal of the wear and tear allowance will squeeze incomes for both new and existing mortgaged landlords too. But most landlords will still turn a profit from their rental home.
Property investment has always been a long-term venture for the majority and acts as a supplement to help boost their retirement nest eggs. Three-quarters of landlords consider capital growth a key reason for investing in property.
Over the last 10 years, buy-to-let has delivered better total returns than other asset classes, almost doubling the returns delivered from both stocks and bonds – returns of 9%, 5% and 6% respectively. With house prices still expected to grow long-term, its appeal remains.
Is there space in the market for both the private landlord and build to rent investors?
2017 is set to be the year of growth for build-to-rent providers and it is likely that institutional investors will drive the rental sector’s growth over the next few years, although only 2% of renters had an institutional landlord in 2016.
The sector’s current focus on wealthier young professionals will give it access to 1 in 5 renters. As build-to-rent grows, its product and offering will have to adapt to serve the rest of the rental market.
What can we expect from the rental market in 2017?
Overall we expect rental growth to rise broadly in line with income growth, increasing by 2.5% in 2017. But the path of the economy and its impact on employment and pay will dictate the performance of the market in 2017.
We expect rental growth to pick up in London, but for rents to cool in the East. Further North the balance of supply and demand will be important, but in urban centres in the North the importance of the rental market will help to support rental growth.
|A Changing Environment||Stamp Duty Surcharge||The Changing Landlord||Yields||Rental Forecasts|