Could buy to let clampdown see more regional investment?
Residential property investment was never this tricky, writes Gary Murphy
During the early years of amateur buy to let investment in this country, landlords seemed to have only two primary objectives to think about – capital growth and yield. The blend of the two provided the investor with a “total return”, although one was often achieved at the expense of the other. So high value areas like London provided stability and good prospects for capital appreciation, but lower returns that reflected lower risk. The lower but more volatile values of say the north east offered much higher yields in compensation for limited security of income and growth prospects. Lenders – and the taxman – were very accommodating. And so the private rented sector bloomed, providing landlords with great opportunities for investment and a wider choice of stock for tenants. All seemed well in the PRS garden.
Residential property investment was never this tricky, writes Gary Murphy
During the early years of amateur buy to let investment in this country, landlords seemed to have only two primary objectives to think about – capital growth and yield. The blend of the two provided the investor with a “total return”, although one was often achieved at the expense of the other. So high value areas like London provided stability and good prospects for capital appreciation, but lower returns that reflected lower risk. The lower but more volatile values of say the north east offered much higher yields in compensation for limited security of income and growth prospects. Lenders – and the taxman – were very accommodating. And so the private rented sector bloomed, providing landlords with great opportunities for investment and a wider choice of stock for tenants. All seemed well in the PRS garden.
But over the past 18 months, the climate has changed. Government and the Bank of England have had concerns. Since April 2016, all new BTL purchases have been subject to a 3% stamp duty surcharge. In January this year the Bank of England introduced stress testing, requiring greater coverage of mortgage costs from rental income (145% – up from 125%). In April, tax relief on BTL mortgage interest began to taper for anyone paying more than the basic tax rate of 20%. The full effect will be felt in the tax year 2020/21. And from next year there will be a ban on tenant fees and a one month cap on deposits.
These government measures are designed to make BTL less attractive to landlords and to free up homes for first time buyers. The Bank of England’s concerns, however, stem from the perceived systemic risk to our economic stability. Hence the latest challenge.
As from 1 October, new mortgage regulations apply to portfolio landlords – defined as those with four or more properties. The Prudential Regulation Authority (part of the Bank of England) now requires lenders to implement a “specialist underwriting process”, in other words, an affordability assessment taking into account borrowers’ costs including tax liabilities, personal income and potential interest rate rises. This will examine the potential borrower’s portfolio as a whole, not just individual additions to it. Business plans may be required.
There are concerns that mortgage rates will be forced up as administrative burdens limit willing lenders, so reducing competition in the sector. Brokers too will be deterred by the hassle of having to advise and submit information on multiple properties just to process a single application. As costs rise, landlords in search of their simple primary objectives – growth and return – will continue to adapt their buying decisions. In 2010, 75% of London landlords bought another property in London. Today it is 49%. So unsurprisingly, according the Office for National Statistics, property growth in the capital has slowed to 3%. Investors have been drawn to areas such as the Midlands and the north of England by lower prices and higher yields. Prices are up 7.1% in the East Midlands and 13.3% in parts of Greater Manchester. According to research, the London landlord now lives an average of 65 miles from their investment property.
The search for value out of London has now spurred domestic interest in buying new homes off-plan. UK investors have woken up to the attraction of advanced purchase of good lettable stock in city centre locations such as Birmingham, Manchester and Leeds – markets until recently dominated by the savvy overseas investor courted by the major house builders at bespoke exhibitions in Asia or the Middle East.
In response to this broadening demand, Allsop is in discussions with various developers to launch a number of regional city centre schemes off-plan next year. Interested parties will be invited to bid for units in bespoke global online auction sales. Each auction will close over a period of 48 hours culminating in binding contracts on the fall of the virtual hammer.
Portfolio landlords will be only too aware of the importance of swift trading in a changing climate – particularly when looking to rebalance in favour of regional cities. Those wishing to sell London assets and reinvest in the regions will need a fast route to disposal. The physical auction room, with its multiple bidding channels (in room, online, proxy and phone) is still the first choice for investors looking to transact efficiently in “second hand stock”.
The rules of the game may have become more complex. But residential property is still a vital asset class. Landlords provide a much needed service for renters. There’s nothing more certain than change – but change brings opportunities. Don’t let them grind you down.
Gary Murphy is a partner, residential auctions, at Allsop
