Report forecasts challenging times for buy-to-let
02 June 2017
New report indicates a cooler market, but with more professional investors; London and the South East continue to dominate, with rents set to increase
The buy-to-let market will continue to provide good investment opportunities for a more professional investor community and equally continue to provide significant tax revenues to the Government, according to a new report from Shawbrook Bank, undertaken by the Centre for Economics and Business Research (CEBR)1.
The report - ‘The UK Buy-to-Let Market’ – is the first analysis of the BTL sector since the new affordability rules and changing tax-regime. While it indicates that those tax changes have had some effect on investor behaviour, the market remains a viable one for lenders and investors. The report indicates that yields for landlords are set to decrease over the next ten years, declining from an average of 5% in 2016 to around 3.5% by 2027 but house price growth remains robust.
A major cloud on the horizon however is the dominance of the London and South East market where the combined share of the BTL investment market is nearly 40%. A significant proportion of these are rental units, with demand from the international migrant community a large reason for the popularity of renting in the capital. If residential prices continue to rise in the capital, and rents correspondingly increase, the report indicates some concern as to the sustainability of this market, especially with Brexit providing some uncertainty for the future of UK migration.
Commenting on the CEBR findings, Stephen Johnson, Deputy CEO and Managing Director for Commercial Mortgages at Shawbrook says: “As the spotlight continues to shine on buy-to-let, the landlord community will need to adjust to lower levels of available debt and will therefore require more equity, or have to grow at a slower pace than was previously possible.
“This will mean a period of adjustment for landlords who will have to consider how the changed environment affects them individually. As with all market shifts there will be winners and losers, but it is most likely that professional landlords with equity and scale from larger portfolios will be better positioned to weather the changes. BTL has produced excellent total returns for property investors in the past, and notwithstanding some of the new challenges, the fundamentals still remain compelling for those who adapt to the new environment”.
The key findings of the report include these:
- Transaction levels are yet to recover: the introduction of the surcharge has had a lasting effect on transaction numbers, which haven’t recovered to levels seen in the months before April 2016. Analysis in the report shows the total number of transactions in 2016 stood at 1,231,120 – taking into account the numbers seen in the months before April and the months after, this number could have been 100,000 higher.
- Higher costs are forcing landlords to adapt: early indications suggest professional landlords are still buying but are starting to look at different locations and different types of property. Commercial and semi-commercial units have risen in popularity as have Houses of Multiple Occupation (HMOs), which were cited as the preferred property type amongst investors in Shawbrook’s latest client barometer.
- Commercial landlords are set to gain market share: since the tax changes for mortgage interest payments only affects private landlords, commercial landlords and those who register their business as a private limited company enjoy a cost advantage. Figures from the National Landlords Association show the proportion of landlords planning to take out commercial loans rose from 10% in July 2015 to 19% at the end of last year.
- Demand for private rental accommodation will remain strong: the report forecasts that the share of dwellings that are privately rented will increase from 21% in 2016 to 28% in 2027. This is driven in part by issues of affordability and raising a deposit; however there is a growing sense that the affordability crisis is something which doesn’t exist outside the capital. Instead, the appeal of home ownership for many may be diminishing.
- Buy-to-let remains a viable investment: with demand for rental properties set to continue the report forecasts a 21% increase in average rents in Great Britain by 2027. However, projected property values and rents, the analysis estimates a decline in rental yields from 5% in 2016 to 3.5% by 2027 as house price growth outstrips rental growth. Keeping in mind capital gains, buy-to-let will become a more attractive investment in the coming decade as property owners benefit from the increase in the value of the property they own with the average cost of a UK home reaching £336,845 by 2027, 59.7% more than in 2016.
Homeownership rate likely to remain above 50%: with the expectation that interest rates will remain around the ‘new normal’ level, mortgage payments will continue to remain affordable, particularly outside of London. Cultural perceptions of homeownership which are less apparent on the continent will also stop the homeownership rate from declining more drastically.
