Jul

What impact will Brexit have?

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Viewpoint

What impact will Brexit have on the UK rental market? That’s the big question right now and one which will probably dominate our thinking over the rest of this year and maybe beyond that.

Will the economic doomsday scenario promulgated prior to the vote by George Osborne and the Bank of England play out, or will the “blue sky” view, the free trade bonanza favoured by the Brexiteers shine through?

There is already speculation on both sides, but the rational research so far is confusing: on the one hand you have reports of the “Brexit Bounce”, where the stock market made a quick recovery; the banks say they are experiencing business as usual, and the economy grew by 0.6 per cent three months to end of June. On the other hand we have GfK’s consumer confidence barometer out this week showing households are pessimistic about their personal finances, and the Purchasing Manager’s Index (PMI), regarded as the bellwether of industrial activity, showing a sharp decline.

On the positive side of the equation banks and retailers are reporting activity as normal, ARLA have come out with an optimistic survey of lettings business, largely as usual, and there have been numerous reports of new investment projects, public and private, and foreign inward investment, going ahead.

It’s therefore really hard to know what’s happening at the moment and I’ve no doubt there will be lots of conflicting reports along this binary theme for the rest of this year. The other big questions which will have an effect on this are: what economic and taxation decisions will be made by the Treasury coming up to the new Chancellor’s Autumn statement, and what progress will be made on the negotiations with Europe.

For now the Scottish question seems to have abated a little, though that might not be the way the SNP see it, and all’s quiet on the Western Front while the new prime minister and her team get their act together for the crucial negotiations with Europe. But all hell is likely to break loose if it appears we are going for access to the EU market without the restriction on freedom of movement.

As far as buy-to-let is concerned, it was already reeling from a three pronged attack on its viability: (1) George Osborne’s shock tax hikes following the Conservatives successful re-election last May, (2) on-going legislative changes bringing more regulations and red-tape for landlords and agents to deal with, and (3) a clampdown on mortgage lending, again inspired by George Osborne and his view that buy-to-let landlords compete with first-time buyers. I suppose you could add to the catalogue the many local authorities bringing in selective licensing schemes, much discredited as an effective tool for dealing with rogue landlords, but nevertheless affecting many responsible landlords trying to offer a good consumer service at a reasonable price.

The question for landlords is: will the new Chancellor look again at Osborne’s “landlord taxes”; will he have a rethink and make some changes? Landlords are hopeful that some concessions may be in the offing, especially if a slow-down in construction and hesitation by landlords to invest becomes apparent.

London and the south east, where by far the biggest concentration of private residential landlords operate, and now representing 37% of London housing stock, is likely to feel the pinch worst. A new London property market report from Deutsche Bank concludes that there will be a “substantial fall in BTL purchases and some selling”. While the report sees the demographics in London as favourable it stresses the already overstretched affordability levels as a problem. The tax changes in particular will have an impact on buy-to-let profitably in London going forward, and unless there is a change, some think unlikely, there is likely to be some selling off of London rental property.

The picture is different outside of London where rental yields are much stronger in northern cities. A LendInvest survey found Manchester and Liverpool to be “strongholds of high rental yield”. CEO Christian Faes says: “It’s very interesting that the top districts for rental yield, which are often found in the North East and North West, voted so overwhelmingly for Brexit.”

“Brexit may create opportunities for property investors, particularly professional and experienced ones. House prices are expected to soften, so some would-be buyers may put off buying. But they still need somewhere to live, which is good news for landlords. What’s more, if house prices do cool as predicted, then investing in property will become even more enticing., says Faes”

You might say, he would say that wouldn’t he, he would take an optimistic view when he’s selling finance, but their research comes up with some interesting statistics: Burnley had the highest rental yield with 7.14%, followed by Blackpool with 6.62%, but London comes out top on capital gains with 14% average gain over the period 2010-2016, followed by Waltham Forest with 13% – will these gains continue, probably unlikely?

Manchester came top as an area for high rental yield with 6.8%. Coventry, Luton and Outer London moved up to joint second place, with a rental yield of 5.8%, followed by Blackburn, which yielded 5.7% on average.

While it looks like the numbers may not stack-up in London and the South East, at least for a while, if you can purchase cheaper properties with better yields, then you will have the opportunity to protect and boost your profits long term. Making money in buy-to-let is likely to be tougher in the coming years, and those most at risk here are those with smaller deposits, highly geared investments where their properties are in arrears, and where rents are low compared with house prices.

But, it’s an ill wind that blows no good: savvy landlord investors can live with the changes and buy cheaper property with higher yields, and that probably means avoiding acquiring property in the Capital – London and the South East, for now, where the average returns between 2010 and 2015, was just 4.86% per annum in outer London and 4.71% per annum in the City, that’s according to LendInvest’s figures.

Landlord property investors, say LendInvest, should be looking to invest in the buy-to-let market in university towns in the North and Midlands: Manchester, Liverpool, Leeds, Bristol and Birmingham, to find the best returns. House prices in these cities can be just one-fifth of those in London, but salaries are on average 70 per cent of London earnings.

My gut feeling is that this post Brexit malaise is no Lehman Brothers moment. The stock market has held up well and is moving ahead nicely, there will probably be a dip in the housing market as there was at the time, but as then the rental market will probably thrive, given the demand for renting. As indicated above, there will be some regional differences, some rebalancing and adjustment to come, but as always, there will be opportunities for those that can see through the fog and act accordingly.

Tom Entwistle

… LandlordZONE.

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