The buy to let market in the UK will continue to provide good investment opportunities looking ahead but there are challenges, according to a new analysis, the first since major changes to the sector.
Landlords will need to adjust and while rents will rise, yields will fall with London and the South East set to continue to dominate, says the report from the Centre for Economics and Business Research (CEBR) for Shawbrook Bank.
It is first analysis of the sector since the introduction of new affordability rules and tax changes and while it indicates that those tax changes have had some effect on investor behaviour, the market remains a viable one for lenders and investors.
The report indicates that yields for landlords are set to decrease over the next 10 years, declining from an average of 5% in 2016 to around 3.5% by 2027 but house price growth remain robust.
A major cloud on the horizon however is the dominance of the London and South East market where the combined share of the buy to let investment market is nearly 40%. A significant proportion of these are rental units, with demand from the international migrant community a large reason for the popularity of renting in the capital.
It says that if residential prices continue to rise in London and rents correspondingly increase, there is some concern as to the sustainability of this market, especially with Brexit providing some uncertainty for the future of UK migration.
‘The landlord community will need to adjust to lower levels of available debt and will therefore require more equity, or have to grow at a slower pace than was previously possible,’ said Stephen Johnson, deputy chief executive and managing director for commercial mortgages at Shawbrook.
‘This will mean a period of adjustment for landlords who will have to consider how the changed environment affects them individually. As with all market shifts there will be winners and losers, but it is most likely that professional landlords with equity and scale from larger portfolios will be better positioned to weather the changes,’ he explained.
‘Buy to let has produced excellent total returns for property investors in the past, and notwithstanding some of the new challenges, the fundamentals still remain compelling for those who adapt to the new environment,’ he added.
The key findings of the report indicate that transaction levels are yet to recover from the introduction of a stamp duty surcharge of 3% on additional properties in 2016 which has had a lasting effect and they haven’t recovered to levels seen in the months before April 2016.
Analysis in the report shows the total number of transactions in 2016 stood at 1,231,120, but taking into account the numbers seen in the months before April and the months after, this number could have been 100,000 higher.
It also says that higher costs are forcing landlords to adapt and early indications suggest professional landlords are still buying but are starting to look at different locations and different types of property. Commercial and semi-commercial units have risen in popularity as have Houses of Multiple Occupation (HMOs), which were cited as the preferred property type amongst investors in Shawbrook’s latest client barometer.
Commercial landlords are set to gain market share as since the tax changes for mortgage interest payments only affects private landlords, commercial landlords and those who register their business as a private limited company enjoy a cost advantage. Figures from the National Landlords Association show the proportion of landlords planning to take out commercial loans rose from 10% in July 2015 to 19% at the end of last year.
Demand for private rental accommodation is expected to remain strong. The report forecasts that the share of dwellings that are privately rented will increase from 21% in 2016 to 28% in 2027. This is driven in part by issues of affordability and raising a deposit, however there is a growing sense that the affordability crisis is something which doesn’t exist outside the capital. Instead, the appeal of home ownership for many may be diminishing.
It concludes that buy to let remains a viable investment and with demand for rental properties set to continue the report forecasts a 21% increase in average rents in Britain by 2027. However, the analysis estimates a decline in rental yields from 5% in 2016 to 3.5% by 2027 as house price growth outstrips rental growth.
It explains that, keeping in mind capital gains, buy to let will become a more attractive investment in the coming decade as property owners benefit from the increase in the value of the property they own with the average cost of a UK home reaching £336,845 by 2027, 59.7% more than in 2016.
It also says that the home ownership rate is likely to remain above 50% with the expectation that interest rates will remain around the ‘new normal’ level, mortgage payments will continue to remain affordable, particularly outside of London. Cultural perceptions of home ownership which are less apparent on the continent will also stop the home ownership rate from declining more drastically.