Far from deterring property investors, the chancellor’s autumn statement looks set to reshape the property-investment market in the same way as the recent student-accommodation revolution that brought improved returns for investors, better quality homes for residents and more properties for owner-occupiers.
Taken together — the extra 3 per cent stamp-duty tax on second properties from next April plus the abolition of mortgage-interest relief for landlords from April 2017 — it could look as if the government is trying to curb the rental industry. Not so, says Stuart Law, chief executive of the property-investment company Assetz, who believes the moves are designed to favour large institutional investors, including pension funds, and other professional investors financing the development of a high-quality, custom-built rental sector.
“The writing is on the wall for so-called accidental landlords, in exactly the same way as it was for student landlords. Legislation on multiple occupancy pushed the student market towards custom-built blocks by dedicated developers backed by private institutions. Over time this squeezed out the smaller private landlords — it didn’t make it impossible for them, but more difficult — so they sold their properties, which were often more suited to be family homes, to home-buyers. The students got much better accommodation, if more expensive, that they are willing to pay for,” he says.
The same is poised to happen in the residential rental market. So whether you are now a landlord or not, how can you benefit from the coming rental revolution?
Weighing up the costs
It is important to note that the extra stamp duty is only paid on new purchases of buy-to-let and second-home properties, so property you own now is not affected, unless you try to change the title deeds (by putting the property into a company).
There had been fears that the timing could result in unforeseen expenses for buy-to-let buyers who had signed up to buy a new-build property, off plan, before the autumn statement but that wouldn’t complete until next spring. However, Lucian Cook, residential research director at Savills, says: “It appears that the new surcharge will not apply to a property exchanged ahead of the autumn statement day, thus exempting new build buy-to-let properties completing after April 1 next year.”
There is still nothing to stop people who want to buy property to rent out from doing so, they still can, although they might make less money from the investment than previously. Potential landlords will need to calculate whether they can afford to absorb the extra costs into mortgage payments, see yields decrease or whether the market will allow them to increase rents.
The Buy to Let Britain report, published by Kent Reliance yesterday, predicts that the “additional £6,600 stamp-duty cost for an average purchase could trigger £55 per month rent rises”.
Cook says he expects the new levy to affect the mortgaged buy-to-let sector most profoundly, adding to the impact of the July budget announcement on mortgage interest tax relief. He expects committed investors to focus on less expensive properties, seeking higher yields.
Potential loopholes
Although much of the fine detail has yet to emerge, there are very few obvious loopholes. One might exist when buyers upsize and, instead of selling, decide to rent out the property they are leaving, according to Adam Challis, head of residential research at estate agency JLL.
Others have raised questions over downsizers who often buy a second home but retain their original home until they feel ready to move renting the new home in the interim or student accommodation bought for offspring which is empty, and ripe for rental, during a gap year.
Cook says: “We understand that if, for example, a person buys a new home, but retains their original home, they will pay the additional stamp duty, but will be able to reclaim it if they sell their original home within 18 months.”
Set up a buy-to-let company
If you want to buy properties for rental and avoid the extra stamp duty you will need to buy within a company. Rolling existing properties into a company will incur costs, including stamp duty, as the title deeds will need to be changed.
The chancellor has said there is likely to be a stamp-duty exemption for companies buying more than 15 rental properties. So you will either need to buy 15 properties with your company or find 14 friends who also want to buy a property to join your company. This latter option could be complicated, warns Frank Nash, tax partner at the chartered accountancy firm Blick Rothenberg, with disputes over rights and equity. If you are not careful it could also constitute a fund and attract the attention of the Financial Services Authority, he adds.
According to the Buy to Let Britain report, the changes announced in the budget — lowering the tax relief for mortgage-interest payments for landlords from April 2017 — have already caused an increase in the number of landlords seeking to incorporate. Kent Reliance saw applications from limited companies surge immediately after the July budget. This has accelerated as landlords have absorbed the impact of the tax changes; in September, applications tripled year on year. One quarter of all buy-to-let mortgage finance demand is now through limited companies, up from 13 per cent a year ago, according to the report.
Invest via funds
Law, who plans to launch his own buy-to-let crowdfunding vehicle, Assetz Exchange, predicts that schemes for crowdfunding property are likely to grow up fast, with bigger and better initiatives created to invest in substantial property deals — including funding developers alongside institutional investors. One of the largest crowdfunding property platforms that fits the bill is Property Partner. There are also several real estate investment trusts (REITs) that invest in and manage residential rental property.
Look for deals
Developers need to sell apartments off plan to satisfy the banks who lend to them and to fund further development. Often the first apartments in large developments are bought by investors and buy-to-let landlords. Therefore we can expect to see developers offering to pay the extra 3 per cent to off-plan investors. This could, in turn, force prices up for all new developments in the long run as builders look to recoup costs. The prospect of foreign investors fleeing Britain’s buy-to-let market could, however, keep prices subdued, according to Law.
Cook says: “Reduced demand from buy-to-let investors means demand from government initiatives such as Help to Buy, starter homes and shared ownership will be important for developers. In the mainstream market there could be opportunities for institutional investors to block buy private rented stock. Although there may be issues where international buyers have helped forward-fund developments in the mid and upper tiers.”
Buy a house boat
If none of the above appeals but you still fancy a second home or buy-to-let property, then forget bricks and mortar and buy a houseboat, caravan or mobile home — all are exempt from the new tax premium.
The five-point housing plan
1.Between 2020 and 2021, 400,000 affordable homes will be built. This will include 200,000 starter homes sold at a 20 per cent discount to first-time buyers; 135,000 help-to-buy shared ownership homes; 10,000 affordable rental properties; 8,000 specialist homes for older people and those with disabilities.
2.Right to Buy will be extended to Housing Association tenants.
3.House building will be accelerated by releasing public-sector land where 160,000 homes can be built. Brownfield sites and undeveloped commercial land will also be released for starter-home building. £310 million will be invested in the building of Ebbsfleet garden city in Kent. Plus there will be planning reforms and incentives for small house-building companies.
4.The Help to Buy equity loan scheme will be extended to 2021. A special London Help to Buy scheme will be created. Help to Buy Isa savers will receive a 25 per cent government bonus up to £3,000.
5.An extra 3 per cent stamp duty tax will be charged on purchases of buy-to-let properties and second homes.
Source: HM Treasury: Spending Review and Autumn Statement 2015
Who’s buying second homes? It’s not who you think
A house in Chelsea and a holiday home in Cornwall is the usual perception of second-home owners. However, figures put together exclusively for The Times show that the clichéd buyer “down from London” is not as stereotypical as was once thought.
The area of England where most second homes are bought, as a proportion of all homes sold in the past year, isn’t in the southwest but Scarborough in North Yorkshire. Here 18.3 per cent of sales in the past year went to second-home purchasers, who spent an average of £172,500 per property. One in ten of the second-home buyers lived in Scarborough already, according to research by estate agency Hamptons International.
In many regions of the country a large proportion of second-home buyers are local people. On the Isle of Wight, 61 per cent of second-home sales went to people who already live on the island. In Hambleton, North Yorkshire, half of second-home owners are from the area, and in Suffolk it is 41 per cent. In Cornwall, where 8 per cent of home sales last year were for second homes, 28 per cent were to people who lived in the county.
So are we a nation of people who holiday close to home? Possibly, although a more likely explanation is that people buy second homes to rent to those who come to holiday near by. So will George Osborne’s stamp-duty premium on second homes and buy-to-let properties stymie these local economies?
“It all depends on the yields. The stamp duty will reduce the yields and disincentivise some second/third-home buyers. But it’s only new additions to stock that will be affected, so it shouldn’t, in the short to medium term, lead to any lack of available property to holiday in,” says Fionnuala Earley, residential research director at Hamptons International.
“Over the much longer term, if existing second or third-home owners sell, new second-home buyers will be subject to the tax, but if the yields don’t work out, one would expect that to depress the price rather than for the property to be left empty,” she adds.
In wealthy inner London areas such as Kensington, Chelsea and Islington, 40 per cent of second-home buyers are local residents. Earley says: “That could be explained by families having a second home for children near by, rather than a second home to escape to.”
Second homes are not always smaller and cheaper than the main family home either. In Scarborough second homes are slightly larger than owner-occupier homes, and in North Norfolk they are the same size. Meanwhile, in Camden second-home buyers spend 62 per cent more than owner-occupiers, and in the New Forest they spend 50 per cent more.
The research shows that there is no such thing as a typical second-home owner and suggests that many people will continue to want a bolthole whether it is near or far from home.
“The stamp-duty changes will effectively add to the cost of buying a second home, and for those who rent them out it will affect the overall yield. However, second homes are rarely solely an investment and while the additional stamp-duty cost may tip the balance for some, it won’t for others,” Earley says.
Lucian Cook, head of residential research at Savills, says: “The changes are likely to affect markets with high concentrations of second homes. In the short term we would expect this to dampen buyer sentiment in a largely discretionary market, with a consequential impact on pricing and transaction volumes. Over the longer term we believe that transaction volumes will recover, once the additional stamp duty is fully priced into the market.”
Source: The Times
Michael Keywood, Director at Belvoir Mansfield, says: ‘Mansfield is an area rich with attractively priced properties for investment purposes, offering good potential yields and capital growth in certain areas, whilst not getting hit with a substantial stamp duty bill. The recent changes to the stamp duty tax legislation is just another reason for investors in the South to look further North.’
