Tax relief cut: Bad news for buy-to-let?

As the UK prepares for the government’s new spending review, the property industry continues to feel the impact of the summer budget. The announced cut in tax relief for landlords to the 20 per cent basic rate has become a major factor for landlords considering whether to leave the private rented sector.

According to a new survey by Your Move and Reeds Rains, the reduction in tax relief is the reason for 50 per cent of all landlords currently looking to sell their buy-to-let properties.

Currently, 9 per cent of landlords think it’s a good time to sell up, with the tax reforms influencing their decision more than any other factor. Many fear letting out a property will become far less profitable when the reforms start to come into force in April 2017, and they are now considering leaving the sector.
 
This loss of enthusiasm is even dampening the optimism of the 31 per cent of landlords who think that now is a good time to buy rental properties. Overall, two-fifths of UK landlords (44 per cent) believe investing in buy-to-let property is more complicated than it was six months ago, a perception reinforced by the new “Right to Rent” measures that require landlords to check their tenants’ immigration status before they let their properties.

Almost a fifth are daunted by this task, and now feel unequipped to let out their houses without the support of letting agents to manage their investment.

“If a tenth of landlords do decide to leave the industry, this would seriously shrink the number of properties available for tenants,” comments Adrian Gill, director of Your Move and Reeds Rains. “The government need to cut the red-tape involved in providing homes for renters if they hope to maintain a healthy supply of rental properties.”

Despite the cool feet, buy-to-let remains a profitable investment for those willing to adjust to the tax change and embrace the responsibility of checking tenants’ immigration status.

UK rents climbed 0.7 per cent month-on-month in October to £1,294, according to the latest monthly index from Landbay. Rents climbed both month-on-month and year-on-year in October across the UK, with the only exception being Scotland, which saw a marginal monthly fall of 0.1 per cent to £696.

John Goodall, co-founder and CEO of Landbay comments: “Seasonality has always been a strong feature of the UK’s rental market so the fact that it appears to be declining in influence is a powerful sign of the increasing strain the private rental sector is under to house the UK population.”

Indeed, newly released data from Savills highlights the sheer pace at which home ownership is falling in the country. 53 per cent of those born in 1960 could look forward to owning their own home by the age of 30, rising to 71 per cent by the age of 40 and 79 per cent by the age of 50. This compares to just 35 per cent of those born in 1980 and 26 per cent (projected) of those born in 1990 being able to own their own home by age 30. By age 40, the majority of the 1990 group will be in rented accommodation, with just 47 per cent predicted to own their own home.

As a result, supply is struggling to meet demand, fuelling steady rental increases. The last time there was a sustained period of falling rents was in the winter of 2012/3, according to Landbay, when rents saw monthly falls from August 2012 to April 2013. Rents have increased every month in 2014 and have been strong this year, notes Goodall, seeing only small monthly decreases between June and August before climbing again in September and October.

The squeeze on supply varies around the country, but the major infrastructure project that is Crossrail is ensuring that parts of London will continue to see housing demand boom, creating jobs and boosting the local population.

Property around the new Custom House Crossrail station, such as Royal Victoria Residence (pictured above), is  expected to achieve rental price growth in excess of 28 per cent by 2020, based on JLL forecasts.

Jonathan Stephens, Managing Director of Surrenden Invest, a London-based property consultancy specialising in high yielding buy-to-let investments, explains: “Quite simply, falling rates of homeownership mean rising rates of renters, so the growing situation in the UK creates a substantial opportunity for those looking to make their money work for them by investing in residential real estate.”

Landlords may be underestimating the rate at which values could increase, adds Gill: “At a time when tenant demand is only rising, shorter supply will only translate into increased rents.”

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