Recent figures from the HomeLet Rental Index show the cost
of a new tenancy in the UK private rental market rose to £913pcm in the three
months to August 2016. That’s an
increase of 3.1% since August 2015.
Much of the press coverage would have us believe that
Landlords are making super-profits at the expense of ‘generation rent’, but the
reality is that landlords are performing a delicate balancing act in which they
are acutely aware of tenants’ worries about affordability, but also aware of
the need for their investment to achieve a realistic yield.
So why has this become such a balancing act for
landlords? And, why does Government need
to think very carefully before introducing any further pressure on the
buy-to-let (BTL) sector?
I and many others have written about the stamp duty
surcharge that was introduced in April this year, and which created a surge of
property purchases in advance, distorting the market, and creating a fall in
demand in the 3 months following April.
However, two further pieces of legislation are only now being properly
understood by landlords – the removal of the 10% wear and tear tax relief,
meaning landlords can now only claim for the actual amount they spend; and, the
phasing-out of mortgage interest tax relief from 2017.
Together, these changes are placing significant pressure on
landlords who have borrowed to acquire and grow their portfolios. For many this is driving down net yields to
2% or less, and for some who are over-leveraged with debt the changes could
push them into a loss-making position.
Many commentators have suggested that this will result in a
wave of property being sold as private landlords divest their properties and
look to invest elsewhere. However,
according to the Association of Residential Lettings Agents (ARLA) 61% of
agents have seen no real movement in the level of housing supply in July, and
my own experience in Oxford is that there has been no discernible change in
August either. This suggests that to
date landlords are not running to the exit door. It is likely that this is partly because
there are few better alternative investments available at present – with interest
rates at historic low levels, and uncertainty dragging on capital markets.
Most Oxford landlords recognise that low void periods, and
strong capital appreciation of their assets, combine to ensure that long-term
their investments remain attractive.
However, for individuals who currently pay income tax at 40 to 45%, the
changes have a particularly heavy impact.
To help reduce the impact of Government tax changes, many investors are
now looking to manage their rental properties via limited companies, and
treating mortgage interest as a business expense. According to Mortgages for Business, the
number of BTL mortgage applications completed by limited companies in the first
half of 2016 was up to 30% of all BTL completions compared to just 18% in the
same period in 2015.
Contrary to the pinion expressed by popular and
sensationalist commentators, Oxford’s and the UK’s landlords are performing a
high-wire balancing act, where they are aiming to re-structure their
investments and take a long-term view of total returns (yield and capital
appreciation) in order to minimise placing too great an extra cost on their
tenants. Whilst there will always be an unscrupulous
few who can correctly be accused of fleecing their tenants, it is quite wrong
to apply that to the majority of landlords who understand their responsibility
to their tenants.
