Recent changes to tax for buy-to-let property has dented confidence among landlords with new research showing many are set to revise their situation and implement new strategies, with some consolidation expected among smaller investors.
The sixth edition of the Kent Reliance Buy to Let Britain report has launched revealing that just 41% of buy-to-let landlords currently hold a positive outlook for their portfolios, down from 67% three years ago, as investors face the prospect of higher tax costs and weakening property prices.
Higher costs are leaving many landlords with little alternative but to increase rents, which now stand at an average of £889 per month across Britain, up 1.9% year-on-year, according to the research.
Kent Reliance forecast that rents will rise further as the mortgage tax changes bite, with one third of landlords expecting to increase rents in the next six months, compared to just 3% who expect them to fall.
With rents rising, and house prices falling in the past two quarters, yields have edged up to 4.5%. Across the PRS, steady growth in the number of households and monthly rents means landlords are collecting a record £4.9bn per month in rent.
Overall, the value of the sector has risen by £68bn in the last year, climbing to a record of £1.3trn, up 5.5% on annual basis, although this is just half the level seen a year ago, owed in part to the slowdown in house price inflation.
In total, there are now 5.5 million households in the PRS, but annual growth of 2.3% is now only a third of the level seen three years ago.
Tenant demand is still growing, albeit more slowly, with 27% of landlords seeing tenant demand increase in the last quarter, more than saw it decrease, but this was down from 39% a year ago, as first-time buyer numbers continue to recover.
On the supply side, there is a noticeable change too. In the first quarter of this year, the number of landlords expanding portfolios only slightly outnumbered those reducing them.
Some 19% of landlords now expect to reduce their portfolios, compared to 13% increasing, as amateur landlords leave the market in response to the new tax rules affecting higher rate taxpayers.
Additional pressure on supply has come from the Bank of England’s Prudential Regulation Authority’s new underwriting standards, introduced in January, with 24% of landlords who have sought mortgage finance this year have found doing so more difficult, with a further 6% seeing their application rejected altogether.
While there is likely to be consolidation in the market as tax costs rise, many landlords have unsurprisingly reacted to tax changes and rising costs through not just rent rises, but also incorporation.
Running properties via limited companies means landlords are taxed as a company, rather than an individual, and can continue to offset all finance costs against rental profits.
Kent Reliance’s data shows six in ten applications for buy-to-let mortgages were via limited companies in 2016. Demand for limited company lending has not yet hit the heights seen last year, but limited company applications have still accounted for more than four in ten loans so far in 2017. With 24% of landlords considering transferring their portfolio to a limited company or a partner or spouse, demand will strengthen in the long-term.
Andy Golding, chief executive of OneSavings Bank, which trades under the Kent Reliance and InterBay brands in buy-to-let, said: “A perfect storm of weakening house prices, higher taxes and lending restrictions have knocked investors’ confidence. On top of this, investors are now being buffeted by the winds of political uncertainty following the election, and its impact on the economy.
“Uncertainty will pass, but the impact of changes to mortgage tax relief and underwriting standards will leave a more indelible mark on the sector. We believe these changes will alter the mix of landlords, creating a more professional and stable sector in the long-term. There are already some signs of consolidation, with highly geared amateur landlords most likely to leave, and we are also seeing investors take action to protect their margins.
“The fundamentals supporting the PRS have not drastically changed. Yes, first-time buyer numbers have been recovering, but there is still an underlying supply and demand gap across the country. Given the inability of any party to win a clear majority in the election, the implementation of a strategy to create a necessary housing boom seems unlikely. Affordability issues will therefore remain, and rental accommodation will retain its importance to those unable to take their first step onto the property ladder.”
https://www.landlordtoday.co.uk/breaking-news/2017/6/confidence-in-buy-to-let-market-slips-due-to-tax-hikes
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