InvestmentsJun 11 2020

Buy-to-Let after the pandemic

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Buy-to-Let after the pandemic

The past five years have been particularly tricky for buy-to-let investors, with a range of tax changes colliding with sluggish price growth, and more recently, the pandemic

Landlords have generally been pessimistic about their future prospects and disinclined to expand their portfolios. The survey from Paragon Banking Group showed that in 2019, three times more landlords were planning to sell than to expand their portfolio. 

And then came the pandemic.  

Jason Hollands, managing director of business development and communications at wealth management firm Tilney says: “The attractions of buy-to-let have steadily diminished in recent years, as governments have taken progressive steps to make it less appealing from a stamp duty, mortgage relief and capital gains tax perspective. In the current political environment, we may see tenants given greater rights too.

The attractions of buy-to-let have steadily diminished in recent years, as governments have taken progressive steps to make it less appealing Jason Hollands, Tilney

"Those factors haven’t changed as a result of the pandemic, but the property market is seriously weakened. While lower purchase prices and ultra-low interest rates might tempt some to invest in buy-to-let, rising unemployment and financial repression is going to have an impact on occupancy rates and rents.”

Tax changes

Among the tax changes announced in recent years were changes to the tax reliefs available for repairs carried out on a property, and a surcharge for those buying additional homes in the UK to the one they live in. 

Cedric Bucher, who runs the TM Home Investor fund, a UK fund that invests in residential property, says the tax changes have had a huge impact on the buy-to-let market.

He says: “House price growth following the Great Financial Crisis has been strong in the UK – among others driven by low interest rates.

"In 2014, 2015 and 2016 house price growth was between 6-8 per cent annually.

"A number of factors then reduced house price growth from 2016 onwards – increases in stamp duty, the much reduced tax relief for buy-to-let landlords and the uncertainty around Brexit. The General Election in December brought some clarity around the direction of Brexit.

"The tax changes started to fundamentally alter the buy-to-let market – in particular for those with significant mortgages. Those with larger property portfolios sold some to repay mortgages on the remaining properties, others set up corporate structures to optimise the tax and income from their portfolios.

"The tax changes are still being phased in and the full impact will only be visible in a couple of years’ time. Overall we believe the structure of the private rented sector in the UK is now shifting from an ‘amateur’ towards an institutional model, very much like what is commonplace in parts of Continental Europe and Northern America."

Pervaze Ahmed, partner and head of the Real Estate practice at law firm Howard Kennedy says the additional 2 per cent surcharge that will be levied on overseas buyers of UK residential properties from April 2021 is likely to to harm demand long-term, but act as a booster for the market until then, as overseas buyers strive to get their purchases made ahead the deadline.

Property write-downs

He added that while interest rates are presently very low, this is a function of the uncertain economic environment, and that uncertainty means the loan to value ratios at which individuals can borrow will be lower, which is likely to depress prices in the residential property market.

Most UK commercial banks have taken write downs on the value of their loan books, indicating they expect many people to default on their mortgages.

This has the impact of potentially increasing the supply of houses on the market at a time of economic uncertainty, something which is likely to mean lower prices. 

William Buckhurst,  head of fund research and investment director at Vermeer Partners says: “We do not normally invest in residential property given that our client base tends to be already very overweight this sector and it is hard to see an immediate move upwards in UK house prices given the inevitable economic recession that is going to follow Covid-19; however, long-term the outlook for UK house prices looks positive given the dearth of supply, changing demographics and low mortgage rates. 

"After all, if people are going to be spending more time working at home they are going to require more space. UK housebuilding equities are a good way to play this.”

Most advised clients are overweight property because a significant portion of their wealth is held in the house they live in, and so they are already exposed to the vagaries of the London property market.

Philip Milton, who runs PJ Milton and Co, an advice firm in Devon says: “We endeavour to take ‘everything’ into account with our advice and guidance and encourage as much diversity [of assets invested in] as is possible.

"Investors in property tend to think the risks are non-existent but we do alert them to the issues which can arise and of course it depends too if they have done so on mortgage or full cash which can mean they have too much in a single asset class.

"House prices are very high – over-extended - but they have been for some time. 

"At some point though there could be a rude awakening and BTL investors could have a serious shake-out, especially those created on vast borrowings with high Loan to Value.” 

Mr Bucher added that the weaker economic environment may mean that fewer people can afford to buy a home, and this is likely to boost demand for private rented property.