IS BUY TO LET STILL A GOOD INVESTMENT? Tue 31 Jul 2018

Certainly, Middle Eastern investors seem to think so!
Certainly, Middle Eastern investors seem to think so!

IS BUY TO LET STILL A GOOD INVESTMENT?

According to a recent Cluttons/YouGov survey of 250 wealthy Middle Eastern  property investors, the UK – and London in particular – is still at the forefront of investment decisions despite Brexit uncertainty.
 
The UK came out joint second with the USA and only behind India in most preferred destinations for Gulf investors.
 
London remained the most attractive location in the UK with a stronger performance than the previous year as 49% of Middle East investors confirmed their intention to commit funds for new build residential, offices, serviced apartments etc. in 2018. Manchester is an increasingly popular choice with 38% expressing an intention to invest there.
 
When opening Bloomberg’s new City of London European headquarters at the end of last year, chief executive Michael Bloomberg said “whatever happens to the UK’s relationship with the EU, London’s language, time zone, talent and culture will position it as a global capital for years to come.”
 
On the other hand it seems increasing management, tax and regulatory costs are marginalising accidental landlords.
For instance, investors have been unable to offset all mortgage interest against profits since April 2017 which will reduce to zero within 2 years. A 3% stamp duty surcharge is now added to the purchase price of additional homes too. As a result, the Residential Landlords’ Association (RLA) claimed in July 2018 that 133,000 buy-to-let units could be lost in the next 12 months.
 
The RLA suggest the extra home levy should not be applied when landlords add to overall housing supply i.e. converting empty offices and shops, large homes into smaller self-contained units or bringing empty homes back in to use.
 
Tighter lending criteria and the tenant fee ban for agents will raise upward pressure on costs for landlords and squeeze rental profits further.
 
Right to rent legislation in 2016 means landlords are obliged to check the immigration status of tenants, face unlimited fines or even imprisonment!

However, we are not yet seeing higher rents or improving yields as a result of an underlying fall in capital values.
 
Capital growth, rising rents and yields i.e. gross annual income as a percentage of value, are the best indicators. It is said that about two thirds of rental properties are owned outright without mortgages so the loss of tax relief will have a limited impact.

Landlords can still offset mortgage interest and other financial costs, repairs, maintenance, renewals, legal, management and professional fees as well as rates, insurance and ground rent against tax.
 
Nevertheless, longer term buy-to-let returns have continued to out-perform many major asset classes such as gold, cash, stocks and shares, according to analysis by Property Partner, the investment platform.
 
Ongoing demand for homes and shortage of stock means property investment should benefit from a good supply of longer-term tenants as a lifestyle choice for the foreseeable future. No wonder the government wants to introduce minimum 3 year PRS tenancies in England – possibly including a tax incentive for landlords – as a way of appealing to the 1.8 million more households who are likely to rent by 2025, according to RICS.
 
Self-managing property by landlords may be a false economy if insufficient time has been allowed to comply with the hundreds of rules and regulations affecting the private rented sector. Landlords could unwittingly issue contracts which are not legally compliant by adapting agents’ agreements or templates found online. Failure to notify tenants of their landlords’ name and address, details of an accredited dispute resolution service or tenancy deposit protection scheme, are other common mistakes which can result in difficulties regaining possession, fines or both!
 
Landlords still need to be professional and offer good quality accommodation if they are to take advantage of longer term investment opportunities which are only likely to improve!
 
Jeremy Leaf, a former RICS residential chairman & independent North London Estate Agency owner.
Summer 2018

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