For landlords and investors to thrive, property prices and rents need to increase steadily, year on year, and the environment should enable them to make enough money to maintain and grow their property stock.
There are certainly signs that 2016 will be a good year for landlords and investors, the first of which is that rents are expected to rise by more than the cost of living. From Belvoir’s own research and analysis, rents are forecasted to increase by an average of 3% across the UK, ranging from 2% to 4%, depending on the area. Inflation, on the other hand, is only expected to rise by a couple of percent, so the additional rental income generated from letting should leave most landlords with some extra profit.
Secondly, property prices are expected to rise, which brings some good news and some bad news for investors. Rising prices are definitely good news for existing landlords, as it not only means an increase in equity and therefore overall returns, but also they may be able to re-mortgage and release capital to invest in more property. This helps spread their risk and potentially enable them to make more profit over time.
However, rising prices aren’t great news for those who want to get into the property investment market for the first time or expand their property portfolio. Prices typically rise when the demand for property is higher than supply, and this is definitely the case in the current market. The problem here for investors is that many buyers are so keen to purchase, they compete strongly and push prices upwards – exactly the opposite of what a property investor looks to do.
The ideal market for investors is when supply is higher than demand. If there are fewer buyers around, those who desperately want or need to sell are likely to drop their price for a quick sale, so this is when you can secure the best discounts.
Probably the worst news for investors this year is the tougher financial burden. In the past, investors paid the same level of stamp duty land tax (SDLT) as those buying a home for themselves, but any transaction for a second home that completes from 1st April 2016 will incur an additional 3% SDLT, the only exemption being properties bought for under £40,000. So an investment property costing £100,000, that doesn’t currently attract any SDTL, will require an additional investment of £3,000, and one costing £150,000 will attract SDLT of £5,000 for investors – substantially more than just £500 for homebuyers.
Although this cost is tax deductible when you sell, it still increases the initial cost of investment and the only way landlords can win from this policy is if it holds property prices back in some areas or they even fall as a result of a drop in demand.
On top of increased investment costs, there continues to be an increase in regulations. From the 1st February, landlords are required to make sure their tenants are in the UK legally. If you let through an ARLA, Propertymark or RICS agent, it’s likely that these kinds of checks are already being made on your behalf, but you should get this in writing from your agent. If you let property yourself, you must be able to prove you have made these checks, otherwise you will be responsible for up to a £3,000 fine if it’s discovered that one of your tenants is here illegally.
Finally, the new Housing and Planning Bill is gearing up this year to tackle poorly and illegally rented property. The Government is considering: extending the definition of a House in Multiple Occupation (HMO) so that more properties may need to be licensed; creating a database of rogue landlords and letting agents; banning some landlords from operating altogether; the sharing of tenancy deposit scheme information with local authorities, and extending rent repayment orders. In addition, they’re looking to help good landlords recover their properties without the need to go to court, if a tenant has clearly abandoned the property.
So, taking all this into consideration, will this be a good or bad year for investors? The reality is that for those investors who already have buy to let property and abide by the law, it’s likely to be a good year. Rental income should rise above the cost of living and property prices are expected to rise too. Although there will be increased legislation, much of what’s being proposed will help banish ‘bad’ landlords, improving the overall market for tenants and landlords. For those who trust agents such as Belvoir to legally let their properties, the changes will have little impact on a day-to-day basis.
The additional cost of making new investment in property is probably going to be the hardest thing for landlords to adapt to this year. However, in my view, one of the possible pros of this is that it could dampen demand from some amateur investors. A reduction in demand would potentially mean that properties could be secured at a more reasonable price. And where properties can only be bought for cash initially, demand still tends to be lower than supply, so for experienced investors who can buy outright, improve and then re-mortgage and gear the property, 2016 could work out just fine.
