Buy to let sector faces some pretty tough times at the moment. However, is it all doom and gloom? We don’t believe so. We remain optimistic and look forward to the future. Here are five reasons why buy to let sector is still attractive and definitely not out of steam. Demand outstrips supply and even with huge funding, it would take some time before prices come down significantly.
Letting Fees Ban
The fees will be banned, full stop. Naturally, the industry was outraged and the government followed with a proposition to hear their voice offering consultancy for which deadline was 2nd June. However, on 18th May we could read in Conservatives Manifesto: “Since 2010, we have capped the cost of credit for expensive payday lenders and will shortly ban letting agent fees.” This has been since repeated in Queen’s Speech. It shows how strongly the government is committed banning the fees altogether. It also shows this was pretty much a done deal from the beginning. Our customers do not need to worry about it though, as our fees will not increase. Our business model is different and we simply don’t rely on those fees whatsoever. Corporate agents will be affected most by far, as their fees to Tenants can come to anything from 30% plus of their lettings operations income. This will result in layoffs and/or decrease in quality and service. There is also a possibility of introducing higher fees to Landlords. Watch out also for those mark-ups on repairs! Although the fee may not actually change much, if at all, suddenly your cost of repairs may seem a bit dearer. Rents will definitely go up. Rent rises in Scotland have outperformed London and we believe the new legislation will be a great opportunity for landlords and letting agents just to get a rise. Landlords should thank the government, to a degree, as this will simply put more money into their pockets. A rise of £50 on a £1,000 rental property is only 5% increase, which between two or three occupiers will not have any major adverse impact onTenants’ personal finances. Nevertheless, it will make them poorer. Based on our example the Tenants will end up paying £600 more each year. The government in effect will successfully eradicate excessive fees being charged to the Tenants but replaces them with excessive rents. The ban could be pushed through as early as in October this year or anything in next 24 months. Quite frankly though, for some landlords and letting agents, it can’t come soon enough…
Even More Legislation
Currently, with 150 plus primary and secondary pieces of legislation, the Private Rented Sector seems to be tightly regulated. In reality, enforcement is pretty much non-existent, which gives plenty of room for exploitation of those most vulnerable. We hear about prosecutions, but an action seems only take place in most severe scenarios and take months to actually bring some results. We do believe this will change quite significantly going forward, driving amateur Landlords and hopefully rogue agents out of the market. Proposals introduced in the Housing and Planning Act 2016 will give local authorities even more power. What comes with power is more enforcement and penalties which local authorities are to keep as their profits. Recent prosecution of a Landlord that housed 31 people in four bedroom house, earned local council £35,000 in costs. With cuts to local governments, it is not difficult to foresee that local authorities could make a really good use of these funds by keeping PRS and hopefully social housing sector in a good shape. Some amateur Landlords will come to a conclusion, that it is simply too much hassle and stress for them. They will either choose to liquidate their investment and put the property on the market for sale. Alternatively, they may instruct a professional managing agent to look after their affairs and the asset on their behalf. Property management is the area we are experts in and very passionate about. We can help you decide what is best for you and show you how we can look after your property hassle free. The government clearly is not interested in addressing housing crisis on the national level. Housing is a responsibility of local governments but funding seems to be an ongoing issue. Some local councils are innovative and proactive. Wychavon Council, for example, has introduced WychMove which seems to be working well, helping them to kerb the problem of 2,400 people on their waiting list for social housing. They also have a good understanding of the private rented sector and work alongside it with some great results.
Cheap Lending & Pound
Money continues to be cheap to borrow and there is plenty of attractive “buy to let” mortgage deals. We twitted this morning about two that really got our attention. You can borrow with Leek United up to 75% LTV (loan to value) at 1.99% rate. The offer is limited to five properties. Or if you have more money to put down, Virgin Money offers 1.54% rate on up to 65% LTV till 1st October 2019. The offer is limited to four properties. If you consider taking a mortgage, contact us and we will put you in touch with a fully independent mortgage advisor. Interest rates are not going anywhere. It is interesting to see that FED (Federal Reserve) in USA rushed with the decision to increase interest rates. As the inflation is expected to decrease quicker now, they may start reducing interest rates again. We believe if inflation will stabilise, Bank of England will be at no pressure to lift interest rates and this should be a firm reassurance to investors that the market is good and buy to let sector is certainly not out of steam. Overseas investors seem to be mainly interested in London market which seems to be slightly overheated at the moment. While those investors may start looking at other European countries with property investment prospects, such as Germany, with the cheap pound and cheaper house prices, London property is up for grabs.
One year on and we have not moved any direction one bit. Is it good or bad then? Neither, business as usual. The only reassurance that came forward is that European migrants are here to stay and therefore, housing will be at the top of the agenda for the years to come. Immigration is not going to be halved and migrants are needed to simply help to run this country. You may disagree, yet unemployment is at its lowest level since 1975. Without hands to work, there simply won’t be any further economic growth. Of course, more migrants will put extra pressure on services and obviously the housing sector itself. We don’t believe in “no deal” scenario. In our opinion reversal of Article 50 is more probable than no deal whatsoever. Therefore, all those landlords that potentially have been worried about the possibility of a decrease in demand for UK housing, can rest assured as there won’t be any massive exodus of people from UK and demand will continue to be very strong.
Numbers speak for themselves. Local authorities have admitted 14,420 households as homeless between October and December 2016. This number is more than half since 2009, with an increase of 78% only since 2011. Those numbers are growing while UK economy is sound and unemployment low. Although u-turns on policies don’t come unnoticed and rather shameful, we are struggling to see what other choice the government has than to reach out to the buy to let sector. Local authorities must provide an emergency accommodations, whether it’s a bed and breakfast or a hotel. 10,000 emergency accommodations at £50 per night come to half a million pounds a day. Being able to step on the property ladder is one thing, not being able to afford to rent a property another. With the horrible events of Grenfell Tower and now 60 towers being confirmed not meeting fire safety regulations will end up extremely costly. The government has failed to build faster while demand has not slowed down. Unless social housing estates will be built on a big scale it is up to local governments and the buy to let sector to work this crisis out. The private sector is ready and willing. Buy to let and build to rent can make significant and positive changes to UK housing. It is up to the government now to make a move.
Uncertainty is a killer for all. Yet, fundaments are strong, so mortgages are widely available and money won’t be any cheaper to borrow. We are entering different, perhaps more difficult buy to let market. This does not mean less rewarding. Although stamp duty had an adverse effect on a number of property transactions, it had not affected property values. At the end of the day, what is 3% extra, against your potential rewards? Prices may go up or down, but with properties, you always need to take a longer time perspective. This should result in higher capital gain and rental yields. There is also a prospect of rents rising further 5% to 10% over the next two years as a direct result of introducing the ban of letting fees.
If you have any further questions just contact us, and we will be more than happy to help.