Mrs Brightside on buy-to-let

Back in the news last week was the extreme escalation of house prices confirming home ownership an impossible dream for many and yet today the Royal Institution of Chartered Surveyors (RICS) has confirmed speculation that growth has slowed significantly in the last 3 months.  The Resolution Foundation, working with data from the ONS, reported that in Greater Manchester the proportion of home owners has dropped from by 14% since 2003 and that the urban West Midlands, West Yorkshire and outer London have seen similar falls.

What does this mean for the investor against a backdrop of the April Fool’s tax of 3% stamp duty on second properties and the restriction of tax relief to 20% on Buy-to-Let mortgages set for 2017.   These measures were to curb the rise of prices in the face of such limited supply.  The theory was that if George Osborne could effectively quash the buy-to-let market then he may free up stock, soften competition and facilitate accessible purchases for those down the chain.

With 50% of the plan activated and prices remaining stubbornly skywards perhaps Osborne wonders what more could he have done to support the next generation in acquiring its own bricks and mortar or to assist the upwardly mobile in finding new walls to paper or windows to drape in designer material? Not least as the stamp duty reforms of Autumn 2014 actually lost revenue for the government to the tune of £620m in only 10 months.

Joking aside, there may be an upside for investors as Generation Rent looks here to stay.

While the gap between earnings and house prices is key there are secondary factors fuelling GR.  House prices have been disproportionate for so long that renting, while in most cases enforced, has become something of a mindset.  Owning property is no longer the status symbol our, once ownership-obsessed, nation saw it to be.  Ironically our society is increasingly adopting the European model and where you live, where you holiday and your lifestyle is, perhaps because ownership is a hopeless prospect, higher on the priority list.   Helen Gordon, Chief Executive of British based residential property company Grainger, also commented in the Telegraph on Monday “people always want to live somewhere better than they can afford.”

The average age for starting a family in 2015 was 30.2 (women) and 33.1 (men) suggesting that the flexible stage of life has increased and an entrenched tenant mentality if and when this generation does ‘settle’.  On top of this, one in five women do not have offspring by the end of their childbearing years – the need to set down roots in specific school catchment areas does not apply and even the security of a regular salary in a regular job is less acute.   With that comes opportunity and a more nomadic lifestyle ongoing.

Someone has to own these properties for GR to R.  Yes, house prices are higher than ever but Land Registry data carries a 3-month delay and it’s not been exactly quiet on the economic front in the last quarter.

Tom Bill, Head of London Residential Research at Knight Frank released last week figures showing a 1.5% fall year-on-year in Prime London property and portal Rightmove announced an average drop of 2.3% in inner London (13 boroughs) since the referendum.  Greater London (all London boroughs excluding the City) has remained static and nationally we have seen a dip of just under 1% – although this isn’t entirely unusual for the holiday season, since 2010 average price falls in July have been 0.4%. (source Rightmove).

Data from LonRes (the London agents’ portal) shows a significant drop in transactions in the capital a drop of 29% Jan – July year-on-year and 42.2% since 2014 and these figures are marginally higher for the £1m+ price bracket.

However HMRC figures show that in the first two quarters of 2016 average monthly transaction levels across the board were actually up 10.5% on where they were a year ago so nationally the market is speeding up.

Perhaps overall and relatively speaking, the position of the investment landlord is not as unattractive as the government had hoped to make it although landlords must be realistic in their expectation, particularly in the capital.

Achieved rents slipped in London’s mainstream market in August 2015 but continue to climb gradually in the rest of the country but the peaks and troughs shown here by Savills demonstrate immediate reaction to economic events followed by relatively quick recovery.

annual-mainstream-growthIn the mainstream market, we expect uncertainty following the Brexit vote which will impact buyers’ willingness to commit to a purchase, potentially acting as a drag on house price growth” said Lucian Cook Head of Residential Research at Savills, last month. “As a result we expect to see demand pushed into the private rented sector”.

This is not an impoverished generation, unemployment is at an 11 year low at 4.9% compared with 7.9% five years previously. While wage growth sits at 9.13% over the last five years compared to 13.86% in the previous five year period. (source ONS May – May).

This is a generation that can’t reach the stratosphere of deposits required and earnings necessary to borrow and, rather than overtly compromise lifestyle or take on an unreliable commute, is resigned to invest finances elsewhere and accept rent as a living cost.

Mat (sic) Hobbs, Lettings Director at Savills comments, “Only last week I was talking to a group of tenants who are investing in a build-to-let portfolio, hedging between them across several dozen units to ensure they have a tangible asset for the future should they want to trade on with rental income in the meantime.  These people are not planning on living in these properties and happy to continue renting for the long-term.”

Mat also gives examples at the upper end of the market families are letting out their London homes and renting elsewhere, say Oxfordshire, to be nearer particular schools in this example, Summer Fields or the Dragon, and helping to fund school fees with the difference in rental income from rental outgoings.

Investment from overseas continues to dwindle with pre-Brexit uncertainty and despite a brief flurry of interest on a floundering pound in the last week of June, luxury new development apartments, designed with this market in mind, sit empty to the frustration of the house-builders.

London may, for the moment, have lost its ‘safe haven’ shine for overseas investors but it remains an attractive place to live and work.   Alongside its history, language and culture only a month ago Standard Chartered, Bank of America Merill Lynch, Morgan Stanley, Goldman Sachs and JP Morgan all signed a joint statement recognising London as “one of the most stable legal systems in the word, a brilliant workforce and deep, liquid capital markets unmatched anywhere else in Europe, all of which are underpinned by world class regulators.”

The rental market has widened beyond the bachelor/ette pad.  Growing families are looking for larger living spaces on long-lets within communities and with access to amenities.

Banda Property is a developer with the mantra ‘Design for Living’.  When founded in 2007 its core audience was an owner-occupier market. Banda’s spacious and luxurious homes are purposefully located near good schools, green spaces and excellent transport links all increasingly attractive to the upwardly mobile rental family.

“Banda creates the finest living spaces possible that combine the ultimate in design with true craftsmanship and technology – they truly are designs for living in” explained CEO Edo Mapelli Mozzi.  “It is no longer only owner occupiers looking for the space and facility offered by the likes of Parkgate House [formerly a Victorian bakery and a mere football kick from Battersea Park] – or the tall and lateral Radstock Street development around the corner where each apartment has significant outside space”.

Mrs Brightside isn’t blind to the pitfalls but looks to point out the chinks of light.

With the fiscal challenges ahead, landlords in a position to do so may benefit from putting their rental portfolio in a Limited Company structure where corporation tax is due and not income tax on profits.   Another option may be to put the properties into the name of a partner with in a lower income tax bracket.  There is also an argument that a flat rate of tax relief levels the playing field among landlords to the detriment of those with a higher income.

While prices remain so high few will see property as an attractive investment and yet The Times reported on Monday that the Centre for Economics and Business Research has predicted average house prices will rise by £40,000 over the next five years.  “Annual growth is set to slow from 5.7% in 2016 to 2.2% next year before picking up in 2018”.

With interest at such an attractive rate for leverage and the growing demand for homes to rent in the private sector, investors might watch for price drops over the rest of this year, particularly in key locations outside London, and then consider the long-term return attractive despite up-front costs and the fear of capital losses.

Some are even speculating that the new Chancellor may even repeal the 3% SDLT on second properties at the next budget.  The Buy-to-Let landlord may just live to see another day.

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