Investors disappointed with the government’s pursuit of its home ownership agenda at the expense of the private rented sector now face a phasing towards basic tax rate relief on mortgage interest payments.
Investors will also face higher acquisition costs, through higher stamp duty obligations for additional properties above and beyond their own home – and purchasers requiring buy-to-let finance may face a requirement for higher personal cash reserves.
Allsop, in collaboration with market research consultancy BDRC Continental, has recently published its seventh issue of The Rent Check. This is a unique measure of the rents being agreed by landlords for PRS tenancies across England and Wales. It tracks the experience of nearly 2,500 members of the National Landlords Association.
We have seen some evidence of an immediate rent hike across the UK as a result of taxation changes, but there is no clear trend that rents are rising significantly. We consider that there are three key market drivers – unconnected with recent tax changes – that will determine rental pricing performance:
• Rents are linked to tenants’ ability to pay, not their ability to borrow. Since it is not possible to obtain bank lending to cover higher rental payments, there is no leveraging effect that will push up rents as far as house prices.
• Price sensitivity in the rental market is far greater than in the housing market. Although rents do tend to be above the cost of mortgages for comparable properties, this is a reflection of a shorter-term low-interest-rate environment. Additionally, tenants are often saving for deposits to buy their own property and therefore seek to save as much as possible by limiting rental outgoings.
• Mobility in the PRS is far greater than that in the owner-occupier sector. Most homeowners will not sell at a loss if they can help it, preferring to stay put until prices exceed those paid. Additionally, landlords are far more likely to offer an incoming tenant a lower rent rather than face a void.
Our research shows that 40% of landlords are planning to increase their rents to help offset pressures on profitability. Some are hoping to increase the frequency of rent reviews in new tenancy agreements.
Although landlords will wish to increase rental income to offset taxation losses, ultimately rental levels will be determined by supply and demand. In other words, only in areas where there is a shortage of stock will the opportunities for rental improvement be real.
Failing that, it is likely that improved efficiency in management strategy will be the primary focus for increasing net returns. Our research indicates that 27% of landlords now consider an online agent to be a more attractive proposition than a traditional manager, and 31% would consider using an online letting agent. To this end, Allsop has developed a “virtual agency” service providing management and letting solutions in the build-to-rent and private rented sectors.
Will landlords disinvest? In our view, this is extremely unlikely and certainly not borne out by recent activity in our auction rooms. Our 26 May residential sale was one of the best attended in years. The determination of the bidders and consequent high prices took us by surprise. Speaking to buyers in the room, it is clear to us that buy-to-let investors, whether smaller individuals or larger corporates, have significant confidence in the security of the private rented sector.
With housing stock in short supply and demand limited by challenging loan-to-value criteria imposed by lenders, renting remains the only option for many.
In short, the next generation will be renting for far longer than its predecessors, in many cases, perhaps for life.
Capital values will be supported by landlords. In fact, 18% of landlords in our research were planning to acquire further properties in the next 12 months. Disinvestment? I don’t think so.
This was the summary of our Rent Check findings:
• Only 3% of landlords have lowered rent across their portfolio in the past 12 months
• 18% of landlords intend to purchase at least one more property in the next 12 months
• 37% of landlords saw tenant demand increase over the past six months.
Gary Murphy is a residential partner and auctioneer at Allsop
