The private rented sector (PRS), and in particular buy-to-let (BTL), is in a state of flux with the impact of new affordability rules and a changing tax-regime remaining high on the agenda.

The issues are fast-moving, complex and highly politicised. While lenders, brokers and landlords are directly impacted, the implications of these changes are far-reaching.

Shawbrook Bank commissioned economic think tank, the Centre for Economics and Business Research (CEBR), to take a current and future view of the private rented sector and in particular the buy-to-let market.

The report highlighted some important areas for further discussion, which led Shawbrook to put together a group of leading property experts to debate the issues in the report, and also to give their views on both BTL and PRS. The summary of those discussions is set out below and offers some useful insight into these pressing issues.

A new landscape

New rules introduced last year mean landlords now pay an additional 3% stamp duty land tax on their house purchases. In many cases this adds thousands of pounds to the cost of an already expensive transaction, at the time causing many to rush through contracts before the deadline of April 2016 to avoid the levy.

The Shawbrook Bank report on the UK buy-to-let market shows transactions had been steady at around 100,000 per month from 2015 until February 2016 before dramatically increasing to 170,000 in the month before the changes were introduced. After the deadline, transaction levels more than halved and they are yet to recover.

That was just the first of a series of new obstacles which private landlords must negotiate. When combined with additional challenges such as changes to wear and tear allowances, the abolition of mortgage interest tax relief, and stricter underwriting rules, some smaller investors and landlords are now questioning the longer-term viability of their models.

These all have serious implications for landlords. Yet there is clearly still demand for property as an investment; the government collected some £1 billion in stamp duty tax receipts in the second half of last year alone, even after the new levy was introduced. But additional costs raise concerns about affordability for private landlords and there is a growing fear that this group of investors is being penalised, while institutional landlords are exempt from many of the incoming changes.

Some brokers are positive about the new regulations, however. Many see stricter underwriting as a sensible way of limiting more aggressive lending, which will help protect the property market as well as landlords from a future crash.

Stephen Johnson, deputy CEO and managing director of the Shawbrook property division, says: “There is a sense already that a shift is occurring within the sector, whether it’s a permanent cooling down or a lull while landlords assess the changes remains to be seen.”

Changing strategies

Certainly, higher costs are forcing many private landlords to re-evaluate their strategy. Some are looking to alternative locations, outside of London and the south east, for example, where lower house prices reduce the burden of stamp duty and the size of deposit. Some brokers say that, while the number of loans they are processing has remained steady, the size of the average loan has fallen, whereas others are seeing landlords explore different asset classes altogether.

Karl Griggs, managing director at brokerage CPC Finance, says: “Landlords still want to do the same business, but they are changing the way they go about it. Some are re-evaluating what they buy, looking at multi-units or student accommodation instead, and others are looking at different regions where they might pay less stamp duty.”

Another area landlords are exploring is whether they should incorporate rather than remain a private landlord – limited companies will be unaffected by changes to mortgage tax relief, and are likely to be able to achieve higher levels of borrowing as a result.

However, this strategy presents its own problems; transferring a property from individual ownership into a company is treated like any other property sale – that means it incurs the usual raft of stamp duty expenses and potentially results in a capital gains tax liability.

The costs involved in switching an entire rental portfolio – some landlords may own 30 or more properties – could soon mount up to the extent that they entirely negate any future tax benefits.

Karen Bennet, managing director of commercial mortgages at Shawbrook, says: “Some landlords are starting to put new transactions through a limited company even if they haven”t yet switched their existing portfolio over. We may see the accounting and legal costs of this come down in the future as it becomes more common.”

Some landlords are, instead, showing an increased appetite to become mortgage-free as an alternative way to avoid the impact of mortgage tax relief changes, which could eat away at all-important rental income.

Indeed, this may be another reason why properties outside the south east are becoming increasingly attractive. In the north of England house prices in many regions are yet to recover from the trauma of the financial crisis. In these areas landlords can snap up desirable properties for as little as £60,000; in London, they may need that amount just for a deposit.

There is a growing sense that the affordability crisis doesn’t actually exist outside of the capital. Many brokers and landlords alike are frustrated that the national debate around buy-to-let has become far too London-centric.

Johnson says: “There is also a sense that landlords are being blamed for changing behaviours in society, but there are lots of factors changing the industry and I think it’s too simplistic to look at the property market as landlords versus homeowners.”

In many cases, for instance, the two types of buyer are looking for very different properties; homeowners typically prefer to buy detached houses whereas landlords are more likely to buy flats or a property in need of renovation. Research from Shawbrook shows around 36% of buy-to-let mortgages are for the purchase of flats while 34% of loans are for terraced homes.

A new generation

The appeal of homeownership may, for many, also be diminishing particularly among millennials. While the issues of affordability and raising a deposit are likely part of the reason for this, much more of it is to do with a change in attitude.

Richard Lambert, chief executive at the National Landlords Association, says: “The mind-set of those aged under 35 is different to the previous generation. They see life as less permanent and less certain, and are reluctant to tie themselves down to one place with another massive debt having often left further education with some degree of existing debt.”

Lambert adds: “Whereas baby boomers have typically defined themselves by the things they have accumulated, this generation define themselves by their experiences. At that point, house purchase becomes a much less important thing.”

Outside of London, renting can also often be more attractive because desirable homes with good landlords can be had for a very reasonable rate. There is a worry that the experience of some renters in the overcrowded London market may have tarnished the view of the sector as a whole.

Property market analyst Kate Faulkner says: “Some people don”t want to buy. In the north east, for example, renting is cheap and it is good. Many renters are treated to beautiful homes, with lovely landlords and no hassle. In London, where stock levels are much tighter, some landlords get away with treating people badly and they see property prices rising rapidly so they’re desperate to buy.”

Incentive ideas

For that reason, many industry experts believe the government should do more to incentivise good landlords, such as tax relief for longer-term leases. Brokers are concerned that in its focus on institutional investors, the government is underestimating the importance of private landlords.

Faulkner says: “There are two million landlords in the UK at the end of their tether; they look after their tenants, providing a legally and safely let property at a fair price. Yet many are getting a rough deal, with their service being treated as a ‘problem’ rather than a much-needed solution. Build-to-rent incentives for smaller landlords, not just large, are a really obvious policy for the Government to bring in.”

Build-to-rent could encourage landlords to snap up unsaleable properties and develop them into desirable rental units. It could also help to address the supply-demand imbalance. Brokers are concerned that there is not a strong nationwide strategy for housebuilding and believe more needs to be done to make sure the right properties are built in the right locations.

This is another area in which private and institutional landlords may complement each other well, as the types of property and location which they build or buy tends to be different. Private landlords may be more focused on the regions of the country where institutional investors may stick to the capital; the former may be keen to redevelop dilapidated properties while the latter may focus on building larger tranches of one type of unit such as student accommodation.


Education, education, education

But the housebuilding and affordability debates are not what is currently front and centre in the minds of brokers. While it is positive to see that many landlords are reacting to the forthcoming regulation changes and shifts in the industry, many brokers are concerned that other landlords are not taking the same steps.

Phil Gray, managing director at brokerage Watts Commercial Finance, says: “Many landlords could be sleepwalking in to a potential problem. There is a huge proportion who might not have seen an accountant or mortgage broker recently who won’t even know about the changes.”

Landlords with higher levels of borrowing could easily find themselves in a negative cashflow position by the time the mortgage tax relief changes have been fully implemented in 2020. Brokers are concerned that these landlords need to act now to mitigate the future impact of those changes.

June Deasy, head of policy at UK Finance, says: “There needs to be as much signposting of these changes as possible across the entire industry.”

The buy-to-let market is changing and there are challenges on the horizon. But ultimately, there is still appetite to invest in property and landlords play a crucial role in the fabric of Britain’s property market.

The fundamental attractiveness of buy-to-let remains, even though yields may fall in the future. Analysis from Shawbrook Bank shows the average yield dropped from 5.7% in 2011 to 5% in 2016 and may fall to 3.5% by 2027. But this doesn’t consider the alluring capital gains that many landlords are enjoying. While yields may have slipped, rents are rising – up 11.7% from an average of £805 per month in 2011 to £900 by 2016. By 2027 the average UK rent is likely to be £1,090.

The coming months may be testing, as many negotiate a raft of changes and find their feet in a new landscape but, crucially, landlords still want to do business – they just have to change how they go about it.


Commenting in summary, Bennett from Shawbrook Bank says: “There has been an unprecedented raft of interventions in the BTL market for investors to digest. Some have already had a pronounced affect, with the stamp duty levy evidently impacting purchase activity amongst landlords.

“Whilst new affordability standards are now in force there is not sufficient data yet available to measure its impact, and we have also recently arrived at the second phase of the Prudential Regulatory Authority changes to underwriting standards where a hard line between portfolio and non-portfolio investors has been implemented. This has the potential to be more disruptive than the ICR (income cover ratio) changes with a more specialist underwriting process to be navigated.

“Further ahead we have the impact of the changes to interest tax relief, and many fear this will only become real for landlords once their tax returns are actually calculated and the tax payments are due.”

We are in a period of adjustment for the market and the £41 billion of new BTL lending in 2016 is likely to be a high for a few years to come. What is clear is that an adjustment is going on in the BTL market, from which there will be winners and losers. As it stands we can safely identify that the market is becoming more complex and the needs for professional advice more relevant than ever. This should favour the specialist community of lenders and intermediaries whose expertise will be increasingly valuable and sought after.

Notwithstanding a more difficult environment, the fundamentals of the BTL market remain robust and as an asset class it will remain an appealing investment with a combination of leverage, strong rental demand and long-term capital appreciation remaining attractive.

It would however appear to be favouring the professional landlord who is most likely to have the equity and scale from larger portfolios to better weather the changes and we will potentially see smaller investors exit the market altogether.

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