With high deposit requirements and limited access to finance, home ownership is becoming increasingly restricted to a smaller group of households, driving up demand for accommodation in the private rented sector.
With high deposit requirements and limited access to finance, home ownership is becoming increasingly restricted to a smaller group of people, driving up demand for accommodation in the private rented sector.
The new, more assertive tax regime for buy-to-let (BTL) investors means that we are unlikely to see more rental supply coming from there, and in fact falling numbers of BTL mortgages suggests that investors in that sector are consolidating their portfolios. This means we must look to the professional build-to-rent sector to expand and fill the gap in our rented housing supply.
The Summer Budget of 2015 marked the point at which politicians sought to discourage BTL investment through tax policy. Firstly, the chancellor restricted the tax relief available on interest payments for BTL landlords (which means that by the 2020-21 tax year, only basic tax relief will be given to private individuals), then he imposed a 3 per cent stamp duty surcharge at point of purchase, and finally he excluded them from the cut in the capital gains tax rate in 2016.
At the same time, the Bank of England began to fret that a resurgence in BTL lending presented a risk that needed mitigating. So it introduced mortgage regulation to the BTL sector through stress-testing affordability, in a similar way to existing rules for owner occupiers. Investors looking to take out a BTL mortgage must now also demonstrate they have a credible repayment plan and must show that their rental income covers costs such as management fees, maintenance and voids, as well as their mortgage interest payments.
All current evidence shows that this has made it substantially more difficult for those with a recourse to debt to enter the BTL market or expand their existing portfolios.
According to UK Finance, the number of BTL mortgages granted for purchasing a property stood at 75,300 in the year to the end of August this year. That is 47 per cent lower than in the year to March 2016 (albeit that total was inflated by a rush to beat the 3 per cent stamp duty additional home surcharge).
The growth in the number of outstanding BTL mortgages is lower still at just 24,800. That figure is a full 60 per cent less than at the post-GFC low point of 2010. More importantly, there is a 50,000 differential between the growth in the number of outstanding BTL mortgages and new mortgage lending. This shows that mortgaged BTL investors are shedding mortgaged stock, potentially by consolidating their portfolios.
Key points
The number of buy-to-let mortgages is falling
The authorities have put a dampener on the buy-to-let sector with taxes and regulation
The build-to-rent sector is expected to fill the gap
Savills research projections are that the number of new mortgaged BTL transactions will fall from 75,000 this year to just 55,000 in 2022, a27 per cent drop.
At the same time, little has changed for the first-time buyer. The average deposit for a first-time buyer in the UK is £25,600, varying from £18,800 across the north of England to £47,900 in the South East to a mind-boggling £99,800 in London. So, irrespective of the support provided by the bank of mum and dad and Help to Buy, the demand for rental stock continues to grow.
Figures from the HMRC suggest that cash investors remain far more active. Their quarterly stamp duty land tax statistics suggest that in the year to September 2017, the additional 3 per cent surcharge was paid on 245,000 purchases. While some of these will be second-home purchases, people buying for other family members and those buying their new home before selling their old one, the majority will have been investment purchases.
Since Gavin Barwell’s tenure as housing minister and the release of the Housing White Paper, we have seen a shift in government’s focus from exclusive support of home ownership to a broader approach to addressing housing need across different tenures.
While all signs point to a continued squeeze on mortgaged BTL investors, we have seen huge growth in the build-to-rent market, with institutions and professional investors such as Sigma Capital Group, Legal & General (L&G), and M&G leading the way.
At the end of the third quarter of 2017, our joint research with the British Property Federation showed that, in addition to those already delivered, there were 79,000 such units in the development pipeline, a number that has increased by 40 per cent in just six months.
Of these, some 24,000 are under construction in a rapidly evolving sector, which has embraced offsite construction and is rapidly changing the nature and range of rental options available to tenants.
While the services and facilities included withrenting the property varies substantially between different build-to-rent schemes, they all share a professional approach to management, where success is measured by their ability to retain tenants rather than signing up new ones.
If demand for rental property from tenants is high, the demand from investors is monumental. Estimates of the volume of cash aimed at the UK build-to-rent sector vary between £30bn and £50bn.
A new vehicle investing in the sector was fully subscribed shortly after launch, raising the full £250m target within hours. And as L&G progresses with its modular-home-building factory, it is clear that investors are comfortable making large capital investments to support delivery in the longer term.
Lawrence Bowles is a residential research analyst of Savills
