In the capital city, it’s all about the long game, despite some increased costs for those with buy-to-let homes
The U.K.’s rental sector is in the midst of a period of uncertainty, as a triple threat of gradually disappearing tax relief, new energy efficiency rules, and an upcoming elimination of tenant fees has landlords pondering their real estate futures.
The trifecta of changes has buy-to-let investors across the nation considering whether to sell in the face of increasing costs or hold onto their investments. For those in London, the latter may seem like the better strategy.
"It’s definitely tougher for landlords," said Kate Eales, national head of lettings at estate agency Strutt & Parker. "But you don’t buy in central London for the short term, people are in it for the long term."
Landlords "should stay where they are," she said. "That's what we’re telling people."
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In April 2017, the government effectively began increasing taxes on landlords by phasing out a mortgage interest deduction on buy-to-let properties. The deduction will be lowered by 25% each year until it’s eliminated in 2020.
Alongside the taxes, the Minimum Energy Efficiency Standards were introduced on April 1. The standards require rental properties to meet a minimum energy performance rating of E, on the scale A to G, with A being the most environmentally friendly.
Landlords—who can receive an energy performance certificate from accredited assessors—must meet the level before a new lease is granted, while existing tenancies will have until April 1, 2020, to get up to code.
A property that fails to meet the requirement cannot be rented, and landlords who don’t comply will face fines of up to £4,000 (US$5,143), according to the Residential Landlords Association. Though on the plus side, landlords will eventually see lowered utility costs as their properties become more energy efficient.
In addition, the Tenant Fees Bill, due to go into effect across England in April 2019, is another change for the sector to grapple with. The bill will bring an end to the varied non-refundable fees letting agents may charge tenants for things like administration costs and credit check fees. But when tenants stop paying, the burden will fall to landlords.
The initiatives are a well-intended attempt by the government at trying to clean up and cater to the changing needs of the sector, experts told Mansion Global.
But across the U.K., some landlords may well decide to leave the sector, said Catherine Westerling, head of lettings at Hamptons International, and "many of them already have."
There was a decline in new homes for rent in July, according to a recent survey by the Royal Institute of Chartered Surveyors, which the industry has attributed, in part, to the recent tax hikes.
This comes amid an already tight housing market, where the inventory of homes for sale remains at a historic low.
But typically, landlords in prime central London "sell a property because they choose to, not because they need to," Ms. Westerling said. "Are we seeing them forced out? No. We’re not seeing significant number of landlords in London exiting the market."
Investors who are pondering putting up a for-sale sign should bear in mind that with 2016’s changes in stamp duty—including the introduction of an extra 3% rate of Stamp Duty Land Tax on purchases of additional properties, such as buy-to-let and second homes, the kind of purchases that make up a large segment of London’s market—it’s not a guarantee that someone will be around to buy the property, according to Tom Dogger, managing director of B N Investment Ltd., a real estate services firm, and the city’s lackluster sales market could lead to capital losses.
London’s sales market has been somber since 2014, due to a combination of the aforementioned increasing stamp duty, combined with Brexit-related uncertainty.
But the worst is generally thought to be over. While London’s property prices dipped 0.1% in July, to £483,800 (US$622,607), prices are 1.2% higher over the last quarter, according to a recent report from the property data provider Hometrack.
With more political and economic stability set to be on the cards post Brexit, whatever the outcome, "it’s better to sit tight and manage through the situation than it would be to make a dramatic decision at this stage," Mr. Dogger said. "Unless you have to sell, ride it out."
The Rental Market is Still Healthy
Property has historically proved to be a good investment "as long as you keep taking a long-term view," Ms. Westerling said. "Over 10 years, peaks and troughs will level out."
She advised that landlords questioning their real estate futures seek financial advice to make sure they've minimized the implications of the tax hikes and "invested in the right way for the medium to long term." That’s what will return the best investment, she said.
Perhaps a silver lining for landlords is the increasing rents experts predict they will soon be able to charge. The reason: Supply is dwindling as a result of landlords departing the buy-to-let sector and investors feeling wary of investing, due to the increased stamp duty costs.
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"The rental market generally is very healthy; there is a high demand for property," Mr. Dogger said.
In July, average rental values across Greater London rose 3.3% to £1,615 (US$2,079) per month, according to HomeLet’s Agust rental index.
The monthly rental value is the highest level in the last two years, which is the timeframe of data that the U.K.-based lettings insurance company displays.
In comparison, rents across the entirety of the U.K. rose 1.3% in July compared to the same time last year, and the average rent now stands at £937 (US$1,206) a month.
As the availability of stock becomes limited, "inevitably, it makes a situation where rents are going to rise," Mr. Dogger added.
The abolished tenants fees are also likely to push up rents—though they won’t necessarily lead to windfalls for the landlords. Without the tenants paying the letting agents fees, landlords will find themselves covering the costs instead. And "without any question, the fees will get passed back onto the tenant" in the form of higher rents, Mr. Dogger said. "They have to get absorbed somewhere in the system," he said.