Buy to Let:
In its Spring 2018 “What next for buy-to-let?” Report, Hamptons International say the outlook for the private rented sector (PRS) remains growth positive, despite a fall in investment.
Even with the recent changes in government policy, which have generally had a negative impact on the sector, the PRS will continue to grow. The Hamptons International Research estimates that there will be six million households renting by 2025. That compares to 4.7 million or 19% of households, today.
Sustained house price growth over recent years in the South of the country has brought down yields for anyone investing now, new buyers, but canny buying still brings good long-term returns, if not even in the short-term. Average yields in London are currently around 5.4% compared to 7.9% in the North West, even so 20% of landlords in London are achieving higher yields than those in the North West says the Hampton’s report.
Cash purchases are hugely important in the sector, says Hamptons, which is insulating the sector from various regulatory and tax changes – reducing mortgage interest relief does not affect these landlords. The report says that 65% of investor purchases were made with cash in 2017, which accounts for £21 billion worth of property.
Although landlords need a healthy return (income yield) to cover costs in the short term, accepting a lower yield may be an acceptable short-term strategy providing the total return, a combination of rental income and capital gains, makes up for it.
On average, landlords selling in 2017 made a total gross return of 69% over 8.5 years, according to Hamptons International, with 60% of that return from rental income and 40% from capital appreciation. Higher historic house price growth in the South means capital appreciation accounts for more than half of total returns.
Now, lower house prices and weaker expectations of price growth in the South are making the North a more attractive proposition for buy to let landlords. Since the introduction of the 3% stamp duty land tax (SDLT) charge in April 2016, landlords have been buying fewer properties, especially in London and the South East, and have sold 50,000 more homes than they’ve bought.
“Landlords seem to be thinking twice before adding to their portfolio or replacing homes they’ve sold,” says Hamptons, but despite these landlords selling more homes than they bought, the private rented sector in England has continued to grow in the 12 months after the introduction of the higher stamp duty charge.
“Between April 2016 and 2017 the number of households renting increased by 164,000, 3% more than2016. We forecast that the sector will continue growing in 2018, and over the next five years. By 2022, 20.5% of households will be renting in Great Britain, up from 19.4% today. By 2025 the sector will reach six million households.”
The performance of property as an investment, compared to other places to put money to work, has discouraged owners from selling their surplus properties. A slowdown in the property sales market has seen more people renting to move (accidental landlords) and a continuing decline in social housing sees more tenants on housing benefit renting in the private rented sector.
The continued growth of the private rented sector, in the face of a decline in landlord purchase activity, has surprised but there are greater forces at play say Hamptons. The growth in demand for renting homes stems from longer-term structural changes in demographics and the housing market as a whole.
These changes are far from unique to the UK, with countries such as Canada, Australia, the US experiencing similar changes in a low interest rate, high asset value, high rent environment, which only goes to exacerbate the renters’ problems when it comes to saving for a deposit to buy.
House prices have been consistently growing above average incomes, constantly raising the barrier to entry for many young, and not so young people, leading to what we now see as a steady decline in home ownership and growth in demand for renting.