Editorial, April 2017

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As the onslaught on the small-scale buy-to-let landlord continues, and it begins to dawn on many more landlords that tough times are ahead, the question on many lips is: is buy-to-let investing worth the candle, can you still make money?

The three pronged attack from government: a new punitive tax regime, stricter regulation with numerous new Acts of Parliament affecting the sector, and now more rigours mortgage application restrictions certainly presents landlords with challenges, but all industries go through good and bad times. In comparison to the buy-to-let boom times, yes it will be tough, but this was an exceptional period.

The stamp duty rise we can cope with, after all, in proportion to long-term gains it’s pretty small beer, but the mortgage interest relief and capital gains tax penalties hard harder to swallow.

Under the Rent Acts (applying to pre 1989 tenancies) tenants enjoyed strong security of tenure and could be evicted only on very limited grounds. The UK rental market was virtually non-existent after these rent controls, and we don’t want to see that again.

The Thatcher administration began to change all that with the introduction of shorthold tenancies in 1980, which really kick-started the rental market. But in 2015 the pendulum began to swing back slightly, in favour of tenants, with new provisions introduced in the Deregulation Act 2015, and in Scotland and Wales the swing could go much further.

The mortgage restrictions centre on lending criteria and affordability. Landlords now have to prove to lenders they can meet mortgage payments in the event of a significant interest rate rise before being granted a buy-to-let mortgage.

So, negativity abounds as we see landlords leaving the sector and others curtailing their investment plans, which is only to be expected when any asset class takes a bit of a dive. But is the buy-to-let investor really the endangered species some commentators would have us believe?

My view is there’s much that can be done to counter the blows that landlords have received, and that longer-term, Government might come to realise how much the housing sector in the UK needs and relies on small-scale landlords.

There is strong evidence to show that the Government’s policy of solving the housing market problem, by encouraging institutional investment into the build-to-rent sector, has not taken off as it was hoped.

A recent study (Understanding the Next Housing Crisis) carried out by researchers at the University of Reading, and presented as a paper at the Royal Economic Society’s annual conference (April 2017), concludes that Britain will never build enough houses to make property affordable for young people: “The increases in housing supply required to improve affordability have to be very large and long-lasting: the step change would need to be much larger than has ever been experienced before on a permanent basis.”

The sheer aggregate size of the small-scale buy-to-let landlords’ investment in the private rented sector, and the scale of the housing shortage, means that the small-scale buy-to-let investor, those with under ten properties (around 80% have under three) is here to stay.

As for those responsible landlords, providing a much needed community service with well managed properties, providing they are in the right locations with good tenants, they will always be profitable long-term.

What we don’t want to see is a self-fulfilling prophecy of doom and gloom. Often the best time to invest is when things are looking at their worst.

With an undersupply of accommodation in many locations (do your research), a population growing at the fastest rate in Europe, and could grow by another 5 million in the coming years, mortgage rates at record lows, Brexit likely to open up more opportunities than it closes, major investments like Cross Rail and HS2, and an economy still growing at record levels, we have reason to be optimistic.

So, can we still make money in buy-to-let? You bet we can, but we need to be more business savvy in the way we go about it than we needed to be in the past.

Tom Entwistle, Editor.

… LandlordZONE.

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How to use CGT allowance when you don’t sell your properties?

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I have never used my CGT allowance as I thought you needed to sell a property to use it. Someone has told me though that it can be used by putting it each year into trust for your children. My understanding is that you have to allocate it to a particular property. Is it the… Read more

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Could the Government’s attack on Small-Scale landlords backfire?

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Viewpoint:

The Government’s attack on small-scale buy-to-let landlords, through a punitive tax regime and aggressive regulation, predicated on a policy of growing a new alternative rented housing provision through large-scale developers and institutional investors, could itself be under threat.

The “Tescoisation” of what the Government has called the “Cottage Industry” of private renting could falter if, as appears to be the case, the uptake of the build-to-sell and build-to-rent schemes for affordable homes is well below target.

With over 90% of private rented housing being supplied by small-scale landlords; buy-to-letters with less than three properties, and small company landlords with limited portfolios, it would take a huge influx of large scale-development to make a dent in that.

A recent study (Understanding the Next Housing Crisis) carried out by researchers at the University of Reading and presented as a paper at the Royal Economic Society’s annual conference (April 2017) concludes that Britain will never build enough houses to make property affordable for young people, stating: “The increases in housing supply required to improve affordability have to be very large and long-lasting: the step change would need to be much larger than has ever been experienced before on a permanent basis.”

To compound the Government’s problems, it seems that developers have been regularly reneging on promises to build cheaper homes alongside those being sold at full market rates. According to an investigation by campaigners, the Sunday Times reports that: developers are “quietly walking away from promises to build affordable homes.”

Council officials, it would seem, are being “outgunned” by the financial and legal might of the large private developers who were granted permission by local councils for building schemes, on condition that affordable homes were included.

Some councils are said to be “giving-in” to demands to change the developer’s pledges, while in other cases property companies are said to be flouting legal agreements because of lax monitoring.

According to the Sunday Times article, in four developments involving one developer group (a London based Housing Association) council officials believe there has been a deliberate and unlawful scheme ongoing which is systematically selling or renting affordable homes at full market rates, though the housing association in question denies knowledge of any wrongdoing.

One dossier seen by the paper, submitted to the local government ombudsman, has identified 46 developments in London where it is claimed affordable homes may not have been provided as pledged.

The ombudsman ruled last December that there had been a failure in monitoring the delivery of affordable homes, including the rent levels changed. The allegations made in this dossier are the just latest setback in the Government’s provision of more affordable homes. A 2013 study showed that 60% of the biggest housing schemes fell well short of local affordable housing targets including projects in Birmingham, Bristol, Cardiff, Manchester and Sheffield.

Councils are given targets by central Government to build a given proportion of affordable homes, which are typically in the rage of 35%-40% of new-build housing. They should be rented at lower rates or sold in shared ownership schemes, and it is usually a condition of planning permission for big developments that these affordable homes are provided.

Why is it that even though the Government offers loan guarantees and tax incentives for large scale developments for rent, there is still a lack of enthusiasm for large-scale institutionally backed developments in the UK?

One significant factor must be the historic importance in the UK of owner-occupation over private renting, but the main one appears to be that private rented sector (PRS) investment model relies more on long-term financial gain (capital appreciation as well as rental income) rather than short-term capital value creation from a quick sale of new-build owner-occupier properties. The PRS model creates greater risk for institutional investors who want certainty.

Some years ago, Mark Hafner of American PRS investor Greystar, speaking about the UK residential property market, said: “The answer is very simple and very obvious; the reason PRS hasn’t flourished in the UK to date is because the for-sale market is so robust. For virtually any piece of land you are going to achieve a higher return faster from a for-sale strategy than you are with rental.”

The issue then is one of investment returns; it is very important to institution investors in terms of risk. Changes in market rent rates, or a change of government, introducing new rental tenures or rent control, particularly with new-build PRS developments, which require a significant investment of capital up-front, are a significant risk factor for them.

How much of an impact large-scale institutional investment in the PRS will have on the small-scale buy-to-let investor remains to be seen, but it would seem that in one respect the economics of this go against the grain of Government thinking, and could well result in the end in a policy re-think at some point.

In the meantime it means that smaller landlords will have to adapt to the changes in their industry, treating these as normal business hazards, reducing costs and adapting to the new conditions as all businesses must. Buy-to-let investments, when managed properly, still offer far better returns than anything else available on the high street.

Tom Entwistle, Editor

… LandlordZONE.

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