Change of Strategy
April marked the three-year anniversary of the stamp duty surcharge introduction for second home purchases. However, this wasn’t the only tax change introduced by the government in recent years that has affected investors over the last few years. The government have also started phasing out the tax relief available on mortgage interest payments, as well as tweaking the amount of relief available on wear and tear, all of which are eating into investors returns.Tenants spent £59.1 billion on rent in 2018, the first annual fall in over a decade.
Following these tax hikes, landlords have been adapting their strategy to find new ways to make their returns. The clampdown on taxation and mortgage lending has meant that yield is becoming increasingly important. Landlords are now having to seek higher yields, rather than rely on capital growth to make their total returns.
Lower entry costs combined with higher yields outside of the capital are enticing investors to look further afield than they have previously. Historically, London landlords bought their investment properties near where they lived. In 2010, just one in four (25%) London-based landlords purchased their buy-to-let outside the capital, with 75% investing in London. However, high house price growth and a clampdown on taxation is pushing investors to look further afield.
Proportion of London-based landlords who bought buy-to-lets outside the capital
Source: Hamptons International
By buying homes outside of the capital, landlords can save on stamp duty too. A landlord buying in London during the last 12 months faced a £24,600 stamp duty bill on average, compared to £5,330 for an investor buying outside the capital. The average stamp duty bill for an investor buying in London is now £11,760 more compared to pre-stamp duty changes (Q1 2016), but only £3,910 higher for an investor purchasing outside London.
Yet the South East remains the most popular destination outside the capital for London landlords, with 11% of London-based landlords purchasing their buy-to-lets in the South East over the last 12 months. But they are increasingly looking further North in search of higher yields and lower stamp duty bills. 34% of London-based investors bought buy-to-lets in the Midlands and North during the last 12 months, up from just 14% in 2015 and just 4% in 2010.
The change in distance isn’t the only difference we have seen. More landlords are purchasing their properties with cash too, to avoid the tapering of mortgage interest tax relief rules, which will be fully phased in from April 2020.
The proportion of landlords purchasing buy-to-let homes in London with cash rose from 33% in 2017 to 48% in 2018 – a 15% increase and now the highest level in seven years. However, much of this cash has come from landlords re-mortgaging to take equity out of homes they already own.
Rental growth on new lets
Following a sluggish 2018, rental growth rose to 2.1% in Great Britain in April, the highest rate since January 2018, as the cost of a new let increased to £972 pcm. Every region in Great Britain saw rents rise. London had the highest rental growth with average rents rising 3.9% year-on-year, followed by the South West (1.8%) and the Midlands (1.6%).
Source: Hamptons International