Exit Strategy

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An alternative investment, property is an alternative to cash and other liquid forms of investment. Arguably, commercial property is more of an alternative than residential because commercial is more tenant-oriented. Normally, selling a residential property with vacant possession fetches more than if let: whereas with commercial property it is normally the other way round.

Cash buyer or borrower, a time will come when you will want to take your profits. Either from selling or (re-)mortgaging the equity or disposing of your interest in a tax advantageous way. Even if that time were not in your own life-time, it will in any event arrive when the direction your investment is taking differs from where the market for the type of property is going.

Investors can buy and sell and tenants come and go to their heart’s content but activity counts for little without rental growth. Rental growth in the market for the type of property is fuelled by tenant demand. What tenants want, the suitability of the building, the location, its age and construction, are amongst the deciding factors. What looks good to an investor might not look so good to a tenant. Market heading in another direction is inevitable. The market is dynamic: day-after day, year after year, from subtle variations to discernible shifts to radical structural changes. It can be challenging to remain in sync, let alone keep up. As for anticipating, judicious choice of proposition to begin with is only the start. Unless you monitor your investment’s performance regularly and have some realistic measure for comparison, chances are that you could miss out.

Inflation is a popular measure: property has a reputation as a long-term hedge against inflation. Inflation and market rent are not linked. Expecting a rent on review to market rent to at least keep up with inflation could be wishful-thinking. It is not only rental income that in real terms can change with the passage of time, capital value can vary also, often substantially depending on purchase price and date of purchase. Assuming market value at date of purchase, whether that value is sustainable depends upon investment market sentiment unchanging (or evening out) between purchase and resale dates. Investor sentiment is also subject to demand, the appeal of the proposition to other investors.

For many private landlords, investment is a passive pursuit. To an experienced professional adviser, the ‘armchair’ investor has some amateurish characteristics: indecisive, dislike of costs, slow to respond but jumping to conclusions. Tenant identity highly prized, the better the covenant the less the hassle, is worth paying a premium price for. But even amongst full-time investors, the one thing that is likely to escape notice is quite possibly the most important. Usually, the tenant’s intention for occupation duration of the property is not communicated in advance. For a landlord, it can come as a shock to be told that the tenant’s request for something or disinterest in renewing occupancy or on the same terms as before could affect the value of the investment.

The ability of tenants to determine the direction of the market should never be underestimated. For the landlord, the property advantages and disadvantages can be assessed, but when the investment purchase price is linked to tenant covenant, what the tenant (including the privity tenant) is considering and planning is more important. For a forward-thinking landlord, keeping tabs on the investment includes a watchful eye on the market sector in which the tenant operates. A classic example is the banks. Over the years, hundreds of buildings let to banks have been sold, often on sale-and-leaseback, to inexperienced buyers who have discovered that not only has there been little or no scope of increase at rent review but also bank branch closures may not just affect the landlords themselves, there might be dire consequences for the shopping locality too.

The inherent risk of illiquidity of property might be lessened by an active market, relaxed bank lending criteria and expeditious conveyancing, but illiquidity exists for a reason: to prevent buyers from allowing enthusiasm to cloud judgement. Judgement involves deciding on the balance of probabilities. When the purchase price is geared to the investment value of the tenant’s covenant, and whether or not the choice of investment pays sufficient heed to property fundamentals, in particular the terms and conditions of an existing lease, a critical factor to be included in investor appraisal is the direction of the market in which the tenant operates.

A strategy is not a plan. A strategy is a series of steps for achieving a plan. When the plan is to sell the investment at some time, steps must be taken beforehand to enhance the marketability. The proposition must be got ready for selling. A combination of keen demand and high prices especially at auction bring out the better properties but many sellers particularly at auction are not selling for the sake of it, but to cash in on investor gullibility.

The best time to sell a commercial property investment is before the change in direction becomes obvious. Wanting tangible evidence before taking action is one of the best ways to come unstuck. By the time evidence emerges, it is often too late. Much commercial property investment on the market nowadays is so overworked and over-priced by sentiment that virtually all of the potential for long-term investment performance has been eradicated. Even if you disagree and reckon there is good value for money still to be found, when buying in the prevailing market for long-term investment it has surely become even more important to ensure that the tenant is keeping up with the direction in which the tenant’s business market is heading, otherwise the landlord is at risk of over-paying and non-recoverable costs.

… LandlordZONE.

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10 year fixed BTL rate at 2.99% from Barclays

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Barclays is launching a range of Buy to Let fixed rates with the headline grabber product being a 10 year fixed at 2.99% with a £2000 fee up to a maximum of 65% Loan to Value (LTV). Other rates to be offered include: 2.09% 2 year fixed max 75% LTV with a 1% fee or… Read more

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Christmas Prize Draw Winner 2016

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The LandlordZONE® Christmas prize draw competition sponsored by the following suppliers to landlords has been concluded and a winner drawn at random.

Elfin Kitchens

Tax Insider

Emerging Property

National Landlord Investment Show

Landlord Manager for Sage

Property Investor & Homebuyer Show

Accommodation for Students

Decorus for Sage

Landlord David Steel is this year’s winner of a £250 Amazon voucher.

Midland’s based David has been a residential private landlord in England for something like 20 years.

Like many landlords of his generation (he is retired now) he got into the landlording business by accident. David initially bought a second house when a relative needed some emergency accommodation after a marriage break-up. However, the relative had a change of mind and David started out on his road to letting to private tenants.

Later he move south with work and purchased another house in the Home Counties, which eventually became another letting when he moved back home.

From there David had realised the benefits that landlords enjoy and has since added 6 more properties.

So now with 8 residential properties and mortgage free, David and his wife find the income is funding their retirement nicely, and what’s more he has few worries about the recent tax changes.

David is like many thousands of landlords in the UK who have funded accommodation for others and are providing a valuable community service and we applaud him for that. He is an accredited under the Dudley and Sandwell scheme operating his business in a responsible way.

… LandlordZONE.

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Sliding scale of rents depending on tenant risk?

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I have a couple of properties becoming available for family lets, but in the past I have found them to be hard to let at the rent level I’ve asked for. Due to taking on fairly high risk tenants (DSS tenants usually with no deposit), and tenants leaving properties damaged and with rent arrears, I… Read more

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Benefit payments direct to landlords in Scotland

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Universal Credit: Universal Credit (UC), introduced by the UK Government in 2013, is to replace six other benefits and tax credits such as Jobseeker’s Allowance, Housing Benefit, Working Tax Credit, Child Tax Credit, Employment and Support Allowance and Income Support. It is currently being rolled-out in stages across the United Kingdom. The Housing Benefit element […]

… LandlordZONE.

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President Trump and the regulatory burden!

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Irrespective of opinions and views, Trump has promised to slash and bin regulations. Ronald Reagan once said that the words all business owners dreaded were ” I am from the Government and I am here to help”. Moving back across the water to the UK, we are drowning in regulations, and no where is the… Read more

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New Year, New Challenges for Buy-to-Let

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Viewpoint:

There is no doubt, private landlords operating in the residential letting sector have taken a real beating over the last 18 months or so.

Negative media coverage and what appears to be a regulatory tirade and tax grab by the government has the average landlord (and 90% of those in the UK own under 3 rental properties) feeling like 21^st Century pariahs.

Landlords have never been much revered by society, and have perhaps seen are on a par with, or even below, used car sales persons, journalists and politicians?

But the resurgence of renting in the UK following the abolition of protected rents, in the 1990s and 2000s, changed the landlord demographic completely.

Out went the rich landed-gentry absentee landlord and in came the middle class investor; the buy-to-let saver, the movers and shakers, the strivers and the pensioner saving for his or her retirement. This was to be achieved by owning one, two or several rentals, when the alternatives; banks and building societies, which were paying paltry interest, stocks and shares were volatile and risky, and pension schemes saw one crisis after another.

The result was a boom in rental property ownership at a time when demand for renting sored. On the one had quantitative easing and low interest rates put property asset prices beyond the reach of many young people, and job mobility meant that they preferred to rent anyway. At the same time, local authorities stopped building council housing, even as many were being sold off, transferring the responsibility of housing thousands of erstwhile social tenants and families to the private sector.

Housing charities often highlight the amount of money government spends on housing social tenants in the private sector, but they fail to point out that this is money that would otherwise have been spent by councils, and perhaps to an even greater degree.

There have been several consequences to this sequence:

• The buy-to-let boom had been such that the government and the Bank of England became concerned about the amount of money out on buy-to-let loans, and the effect of this should there be another 2008 style slow-down (crash). This led to a plethora of legislation to tackle rouge landlords, legislation that affects all landlords, a crackdown on buy-to-let mortgage availability and a more punitive tax regime for landlords.

• The government came under increasing pressure to do something about the “housing crisis”; the way a minority of rouge landlords were treating mainly social tenants, and the inability of the young to get onto the housing ladder.

• The government, financial institutions and large property developers became aware of the huge potential of the growth of residential renting in the UK and started to invest in large developments of rental housing, all to be professionally managed US style, following substantial government incentives.

The result is that confusion reigns for many landlords and agents in the UK residential private rented sector (PRS), with pressure groups from all sides impacting on them, and a rental property market that has seen seismic change over the last 20 years.

Despite all of this, the UK rental market (PRS) is still growing (albeit unequally) despite the changes.

Many would have expected a large decrease in the number of rental properties on the market after the tax changes, namely the reduced mortgage interest rate relief and increase stamp duty on second homes. But recent research shows that new rental listings in November 2016 rose by around 7 per cent, a similar figure to October. Although significant regional variations are evident, London saw a roughly 1 per cent decline, four other major UK cities are said to have experienced triple-digit increases, while others recorded falls.

However, despite all the above hurdles for buy-to-let landlords to contend with in 2017, there are still more challenges to come. One of these is the controversial announcement in the Chancellor’s Autumn Statement about a ban on letting agents’ fees for tenants, planned for introduction in 2017, but with so much going on in Parliament and the need for a full consultation (set for March) this may not happen too soon.

The details are still to be decided, but ostensibly letting agents will not be allowed to charge fees to tenants covering administration charges, which may include referencing or credit and immigration checks etc., the costs of which are likely to be transferred to landlords.

Apart from the impact of this on letting agents, where more landlords may try to defer these extra costs by doing more of their tenancy management themselves, there is likely to be an attempt to recoup at least some of the extra the cost by increasing the rents.

The Association of Residential Letting Agents (ARLA) says that almost half of UK landlords, when questioned, said they would move to self-management “if their profits were being squeezed”, despite claims from some quarters that letting agents not only save landlords almost £2000 per year, they make their lives much less stressful.

The profits squeeze is already on the cards for those landlords with large mortgages, and especially for high and higher rate taxpayers, after April this year, when the new (mortgage interest) tax regime comes into force. It has been estimated that some 400,000 landlords could be pushed up into a higher tax bracket.

Another considerable threat on the horizon for many buy-to-let landlords, particularly as a large proportion operate with older low energy efficient properties, is new legislation due to come into effect in April 2018, which will make it unlawful to let rented property with a poor energy efficiency rating.

Rental properties, from April 2018, will all need to have an Energy Performance Certificate (EPC) with an E rating or better. Figures published by the Residential Landlords Association (RLA) indicate that there are less than 0.1 per cent of UK rental properties with an A rating, 35.5 per cent in the D category and nearly 8 per cent of the total (about 432,000) in bands F and G. The cost to landlords of bringing these latter categories up to standard is likely to be considerable

Future Growth

Research carried out by The Royal Institution of Chartered Surveyors (RICS) indicates that the number of UK households in the PRS rose from 2.3m in 2001 to 5.4m in 2014. RICS is predicting that by 2025 this figure could increase by around 1.8m.

On the rent front, Savills has predicted that by 2021 rents will have risen by just short of one fifth – almost 20%.  That is 6 per cent age points faster than their prediction on house price rises, at 13 percent, over this same period.

Changes mean higher rents, lower initial tax take

Landlord bashing has been a particularly harsh over the past couple of years, but given the need for rental housing in the UK there is a certain irony in that the stamp duty land tax take (receipts) has been downgraded by the Office of Budget Responsibility due to fewer residential transactions taking place. The Laffer effect, the inverted U curve which shows that beyond a certain point, tax increases actually reduce total take revenue, appears to be at work here.

As we go into 2017, landlords are likely to be more concerned about costs and the additional services they are paying for. It could certainly lead to a downturn in the demand for agents’ services and more competition between agents.  Internet-based agencies that provide a basic service at a lower cost may gain market share?

With the tightening of landlords’ profit margins will come pressure on landlords to raise rents. Belvoir Lettings (BLV), which operates a network of 300 franchised offices across the UK, has forecasted that rents will rise by 15 per cent in the next three years.

Estate agents Savills is making similar predictions, that rents will rise 19 per cent on average by 2021; this they argue will be faster than house price rises over the same period, which it forecasts will rise by 13 per cent. In London Savills thinks rents will rise by nearly 25 per cent over that period.

Will Government (the Chancellor) change its mind on its dealings with small-scale landlords?

A housing white paper is due for publication in late January, and there has been some petty high profile calls for some of the new taxes on landlords to be rolled back. These have come from parties and MPs within the government itself. Four Conservative peers registered their disappointment that the new chancellor, Philip Hammond, did not address the stamp duty issue in the Autumn Statement, and others have called for a re-thing on the mortgage tax relief issue.

However, with stamp duty land tax and other landlord tax receipts forecasts by the OBR to increase considerably during the course of this Government, it may be hard to convince the Treasury?

Tom Entwistle, Editor

… LandlordZONE.

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2016 saw the highest pension fund returns since 2009

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New data from the upcoming Moneyfacts Personal Pension and Annuity Trends Treasury Report has revealed that last year pension funds enjoyed their highest returns since 2009. Despite considerable economic and political uncertainty during 2016, the average pension fund finished the year up by 15.7%. This is the fifth consecutive year of positive pension fund growth… Read more

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The Basics of Buying International Property

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Buying overseas property can provide a wealth of benefits unattainable in the UK market. These benefits can be simple, such as acquiring an international property that fits your retirement plans. They can also be more complex.

Investment in up-and-coming international communities can yield high return rates. You may also be looking to purchase more affordable property than the UK offers or seek out lower mortgage fees.

Whatever the reason behind purchasing property abroad, the process is undeniably more complicated than buying domestically. Yet, that needn’t put you off. Buying property abroad can be simplified when the process is carefully considered.

Understanding Motive Is Key

Clear motivations must be considered first and foremost. Individual countries will have unique benefits and drawbacks of property acquisition, just as the UK does. You are unlikely to find a nation that ticks every box without a trade-off — if it’s too good to be true, it probably is.

However, identifying exactly what you want to get out of your overseas property allows you to find the best location for developing your portfolio.

The USA offers great opportunities for property investment for example. Maintenance, tax and costs per square foot are low, not to mention it is an attractive nation with no language or cultural barriers and travel from the UK is fast and easy. Yet, the yield is also low. Therefore, it’s a strong candidate for building a large portfolio on a lower price band or acquiring retirement property, but it’s not great for high profitability.

However, if profit is your primary concern, then you will find other countries that lack the attractive nature of the USA but provide much higher rates of return.

Get on the Right Side of the Law

The legality of buying property abroad isn’t as much of an issue as you might think. Even countries like Australia, who have incredibly strict immigration laws, will allow for most British citizens living in the UK to buy property. However, all countries have different legal restrictions you have to follow. Some don’t allow for you to own agricultural land while others levy extra taxes and other costs. You may also find you need special permits.

It is vital you know exactly what is expected of you when buying property abroad, such as what your rights are and where things differentiate from domestic purchases. They best way to do this is to deal directly with government ministries, getting all relevant information, along with going through independent advice services. This will increase the time it takes to acquire property, but it will ensure you are aware of all the obligations and legal requirements of owning property overseas.

Buy from the Right Seller

When buying international property, it is tempting to buy from commercial developers. The benefits are clear: easy, international communication and a business set up to deal with customers like you. However, there are drawbacks.

A good looking property development is no guarantee of quality or even sale. Not to mention developers are notoriously pushy on sales and some projects are never even finished. It might be the more difficult option, but buying privately through estate agents, as you would in the UK, is likely your best bet.

While it might come with some cultural and language barriers, the trade off, being able to purchase property in an established location where you can get genuine feedback from residents and proper market valuations, is worth the extra hassle.

You can also find UK based estate agents that deal in international property. Choices are often more limited, but they do exist.

Don’t Forget the Normal Procedures

Buying property abroad is an unusual situation, and it can be all too easy to focus on the new elements of acquisition. Never forget to follow the normal procedure for purchasing property while scouting abroad. Ensure you have surveys carried out, pour over contracts carefully, haggle on price, etc.

It’s recommended you create a checklist of everything you would normally look out for and do when buying property domestically and apply it to your international purchase. The simple excitement and intrigue of moving into a new type of property ownership is enough to throw even experts off their game.

Working with Local Experts Can Relieve a Lot of Headaches

Online research and trips to your chosen nation/location of property of acquisition can only teach you so much. While it can be tempting to keep costs down and to go it alone, especially if you are very experienced in the world of buy-to-let, local experts can help avoid nasty problems and provide valuable insight.

Their local knowledge can help you learn more about why you should or shouldn’t purchase a property in a particular location, potentially saving you from massive problems in the future. They can also assist in navigating language and cultural barriers in the property purchasing process and ensure you fully understand and are aware of what is on your purchase contract, even if it’s in another language.

Article Courtesy of Heather Darby of London relocation company Momentous Relocation. The team at Momentous Relocation are experts in acquiring international property, regularly helping their clients find the perfect home and dealing with all the complicated administrative work that comes with it.

… LandlordZONE.

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Keep up-to-date on all things PRS in 2017

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With shows at venues throughout the UK during the course of this year, PropertyNet.Media are focused on helping you stay one step ahead in the private rented sector.

The Landlord & Letting Show is the place to be for property professionals who want to be kept informed of all the latest developments, get industry insights and top tips and save money.

Each show offers a wide range of seminars, workshops and panel discussions, as well as one to one advice sessions, so you will certainly find the answers to any industry-related questions you may have!

What’s more, the Landlord & Letting Show is a great place to pick up some fantastic product and service deals in the exhibition.

It’s also the perfect opportunity to chat to and network with fellow property professionals and pick up CPD points for attendance if you are accredited!

So visit the website at www.landlordshow.info and book your free tickets to ensure you keep yourself up-to-date and find out what 2017 has in store for the PRS!

We look forward to welcoming you to the #landlordshow at your chosen location this year.

… LandlordZONE.

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