Opportunities in the buy-to-let market

After a sustained period of growth, the buy-to-let market began to run out of steam in 2016.

Changes to the tax breaks available to investors — removing the ability to deduct mortgage interest from letting income and changing the previously generous provisions for wear and tear — all took their toll.

A 3% additional stamp duty charge was also introduced, while lending regulations were tightened. Added bureaucracy for landlords also became a deterrent. While buy-to-let investors had come to expect significant capital gains from their holdings, this was no longer certain as the housing market — especially in London — fell in value.

The result has been the departure of many ‘dinner-party’ landlords — owning one or two additional properties — from the sector.

With low growth rates and more paperwork, many smaller investors simply sold up and found alternative investment vehicles. Analysis by Hamptons International showed investors spent £5.2bn less on buy-to-let property purchases in the first half of 2018 than they had in the same period in 2015, a drop of 30%.

However, there remains plenty of appeal for those willing to commit properly to this market. As casual owners exit the sector, buy-to-let is becoming ever more professionalised as individuals and companies adopt a more rigorous approach to acquiring the right properties in the right areas, and getting them ready to rent within a limited timeframe on a tight budget. Perhaps most notably in the housing sector, the balance of today, there is, therefore, noticeably less competition than there was before.

Even if we don’t see the capital growth which has been evident over the past two decades, the income available from property investment can still be attractive compared with other asset classes.

Landlords have to pick carefully, but Your Move’s most recent England and Wales rental tracker highlights a yield of around 5% in the North East and 4.8% in the North West, well ahead of inflation at 1.9%. By contrast, a 10-year UK government bond pays an income of just over 1%.

Higher stamp duty on second homes has had the desired effect of freeing up supply for new homeowners, with more first-time buyers getting on the housing ladder. However, there will always be a market for private rentals, 4.6 million households in England (20% of the total) rent from private landlords.

Many millennials, for example, enjoy the flexibility of renting rather than buying, which allows them to make the most of career and travelling opportunities. This is likely to support the sector in the longer term.

An additional problem for landlords building up a property portfolio is access to finance. The rules around lending have tightened, particularly for owners of four or more properties.

Lenders typically look for rental income to cover 125–150% of mortgage payments, with larger deposits and high fees needed upfront.

However, after a period when finance was difficult to obtain, specialist lenders are broadening access to finance for buy-to-let investors, offering more flexible terms than mainstream banks. Together, for example, provides buy-to-let loans for a variety of property types, and is willing to consider buyers with less than perfect credit histories.

The boom days may be over, but there is still life in the buy-to-let market, particularly for those who view it as a long-term investment rather than a quick-and-easy route to high returns. With the right financial backing, it can still prove profitable.

Leave a comment