Buy-to-Let has been one of the real UK success stories of the last 20 years or so, with growth rates most industries can only dream of. From a standing start in the eighties, recovery started with the introduction of the Assured Shorthold Tenancy (AST – 1988 Housing Act), and was given another boost with the introduction of the Buy-to-Let Mortgage in the Nineties.
Having been devastated by the effects of the previous 30 years of rent controls pre 1988, the UK rental market had reached its nadir at around 6 to 7% of households renting. The AST meant that at last landlords were able to let out properties in the secure knowledge that they were able to achieve market rents and, when things went wrong, they were able to get their properties back.
The Buy-to-Let Mortgage meant that investors could at last borrow money at rates equivalent to domestic mortgages, instead of at punitive commercial lending rates as the only choice available to landlords hitherto. Once they had tried it, lenders found that on average default rates on buy-to-let mortgages were actually lower than with owner occupied mortgages.
The combination of these and other demographic and economic factors meant that the market expanded at a phenomenal rate throughout the first decade of the 21st century, to the point today where almost 19% of households are renting. This, coupled with the fact that social housing provision has largely stalled, means that not only did the private rented sector (PRS) overtake social housing provision in 2013, it is expected to grow to around 25% of all households by 2020.
With interest rates at record lows for many years post the 2007/8 crash, savers and investors have had limited choices of where they could get reasonable and safe returns on their money. Of all the choices available, property naturally stands out as a safe haven for savers’ cash, not only giving a regular income when managed efficiently, but the prospect of real capital growth in a market with a structural supply shortage coupled with high tenant demand.
However, all this has had the effect of thrusting the role of landlords, property investors and the property industry generally squarely into the media spotlight. This effect seems to have come to a head in 2014. The success is often perceived by many as one sided, with landlords (not the most revered occupation, perhaps on a par with, or even blow, politicians, journalists and used car salesmen in terms of public popularity) becoming wealthy at the expense of large sections of society.
It was perhaps inevitable then that 2014 would see the rumblings of public dissent, fired up by the media and campaigning groups. With the phenomenal increase in numbers, many more landlords are taking on the mantle of erstwhile social housing authorities.
It should be no surprise then that more and more landlord-tenant problems would rise. Couple this with the antics of a small minority of rouges in the industry, as every industry has, and these issues have become media and campaigning targets for changes in tenancy laws.
Many in the know in the industry feel that the statistics on this being bandied about, particularly on the issue of so called “retaliatory evictions”, are inaccurate and exaggerated. Some MPs and Peers say they are “bewildered” by the plethora of figures being claimed about “revenge evictions” by the campaigning organisations, which are opposed by industry bodies. The All Party Parliamentary Group for the Private Rented Sector (APPG) is now calling for more objective evidence to establish the scale of the ‘revenge eviction’ problem before the Private Members Bill brought by Sarah Teather is resurrected.
It’s perhaps inevitable that with the rise in their numbers the tenant community is becoming a political force to be reckoned with, now consisting of around 9 million tenants. MPs are well aware of this, especially approaching a general election. The introduction of the Tenancies (Reform) Bill 2014-15, ironically being added to the Lords reading of the Deregulation Bill 2014-15 in January, plus other political party proposals and campaigns to introduce forms of rent control, long-term tenancies and eviction restrictions, will have their effects on but-to-let investors’ decisions in the future.
So, what of the future? A comprehensive review of the rental market in 2014 by property market analyst Kate Faulkner, commissioned by Belvoir Lettings, concludes that the rental market is likely to flat-line with “static or low rental increases in 2015.”
Dorian Gonsalves, Belvoir’s Director of Commercial and Franchising said:
“Rental rises are likely to be restricted by factors such as continued low disposable income, anticipated interest rate rises and a forecast of economic development in 2015 that is expected to be lower than this year,”
London and the South East has seen the highest growth in property prices and rents over previous years, with moderate but patchy growth elsewhere, and some regions such as the North-West and Midlands showing actual falls.
With all the uncertainties surrounding an up-coming general election next May, UK economic growth is likely to moderate from the highs experienced over the last 12 months. Despite continuing employment growth, early signs of wage growth, and exceptionally low inflation figures, helped by a dramatic drop in fuel prices, rents and property prices will likely follow suit.
When compared to inflation, property prices have done well over recent years and the feeling is this will continue on a more modest scale, particularly in central London where investors have seen the best of the growth. London yields are being compressed to as low as 3 or 4% gross leaving little return after expenses for new buy-to-let investors.
Pension freedom day next April could see a boost to buy-to-let as new investors with new capital look for a safe haven for their future pension funds, under their own control. However, the over 55s with no experience of property investment should be cautious. Property is not a passive investment and tenancy problems, if not handled properly, not only restrict income, they bring worry and stress which these investors may not be prepared for.
The Mortgage Market Review and EU regulations have restricted mortgage availability but not excessively for serious buy-to-let investors. But interest rates are certain to rise eventually, though this rise is predicted to be slow and steady, and starting in the latter half of 2015.
As interest rates start to rise, some landlords may find it difficult to pass on the extra costs to cash strapped tenants. Without the ability to raise rents, these landlords may be thinking about exiting. In these circumstances new investors could find it difficult to make the numbers stack-up in some locations.
With the build-to-rent initiative looking like it will gain some traction, and institutional investment in rental housing provision, and student housing in particular, supply and demand is likely to come more into balance over time. New buy-to-let investors need to do their research very thoroughly before committing to any particular location, as an influx of new investment from these sources could also put a damper on returns.
Despite these negatives, with the recent success of the UK economy being largely consumer driven and housing-market focussed, the chancellor will do all he can to keep the good news flowing in the coming months, up to and following the budget on the 18th of March 2015.
Of course, the uncertainties leading up to an election can’t be avoided. The Coalition Government have acknowledged the importance of the private rented sector and have been largely supportive. They have avoided the many calls for drastic regulation and new legislation, preferring a voluntary approach to controlling the market, but the next government could be an entirely different story.
If we follow the line of other regions such as Wales and Scotland, England could be in for changes to tenure laws which would make life more difficult for the small private landlord. Given the size of the PRS now, landlords are increasingly looked on as providers of quasi-social housing, traditionally the preserve of local authorities.
Whilst local authorities generally have the size and resources to tolerate problem tenants, this is far from the case with private landlords. Given the fine balance between profit and loss for the small scale buy-to-let businesses in some locations, many landlords will just not tolerate a hostile anti-landlord regime; they will simply sell-up.
However, given the importance of the PRS to the country and a growing modern economy, it is likely common sense will prevail in the end, and any changes will be sensitive to landlords’ difficulties as well as those of tenants.
The buy-to-let industry is far too important to be destabilised by too much government interference and over regulation, and is likely to continue on its growth path to 25% of the market and more. But one thing is certain: landlords will need to be increasingly professional in the way they manage their buy-to-let businesses and tenancies if they are to maintain their profitability long-term.