December 15, 2017 jim1

The Buy to Let market, what are the emerging trends?

The Government’s Tax and Relief changes over the last 3 years have started to result in significant shifts in the structure of the Buy to Let property market. The market is worth over £1 trillion and so understanding these changes and their future impact is important both for Landlords, Prospective Landlords and the growing Rental community.

If we are honest most of the changes were predicted from the day the  Chancellor started to introduce the new rules and three of the most significant resulting trends are clearly visible in the Buy to Let property market of today.

The first trend which was predicted was a shift away from individual Landlords who own one or two properties to Landlords who own ten properties or more. The  new challenges for Buy to Let property Landlords were aimed squarely at individual smaller portfolio Landlords with higher stamp duty, reducing mortgage relief, reducing expenses claimable against Tax,  all impacting on the returns they achieved.  Many of these Landlords were individuals who either from their savings, or by accessing their Pension Pots had felt Bricks and Mortar represented a safe investment from which they could obtain a reasonable return on their money. Alongside the possibility of Capital gains from a strong property market, and the ever-increasing demand for rented property it seemed a far better option than the level of risks and returns they could obtain elsewhere.

It still is a fairly solid investment of course, its just that the rate of return has fallen due to the Chancellors changes. As a result of the changes these Landlords have put the brakes on expanding their property portfolios and the flow of new individual entrants to the Buy to Let property market has slowed down. In turn this has contributed to a slow down in house price increases or in some areas to falls in house prices. In fact these Landlords accounted for 62% of the rental property market so any impact was always going to be significant. Uncertainty over House price rises or falls then puts off a few more prospective entrants to the market, so its probably no surprise that the rental market grew so slowly last year.

I guess this trend will continue until the market has fully settled down, House price inflation resumes and or rents start to rise significantly due to a shortage of rental property. Individuals looking for a return on any cash they possess or can access will now look at the returns from other investment routes depending on the level of risk and return they are comfortable with , Bitcoin anyone?

The Second trend is the increasing impact of Landlords with large existing property portfolios. For these Landlords the change to incorporate into a company brings a whole slate of positive benefits. As they are treated as a business they avoid a number of the financial challenges the Chancellor imposed on individual Landlords. Equally they can claim the financial benefits of operating a company. So for anyone with a large property portfolio, moving the properties into a company is a no brainer.

Of course much of the Buy to Let property market was already owned by companies with large portfolios, and they and newly incorporated companies are starting to dominate any growth in Buy To Let property.

Many of these companies are based in other countries and have always invested in the UK property market and they are continuing to expand their property portfolios. As well as being based abroad many of these companies are ultimately harboured offshore in tax havens. Some recent examples have shown that these companies have snapped up the majority of properties becoming available in new developments. As a result of this, proposals have been put forward to limit the level of new properties in any development which can be purchased by what are described as Foreign companies. I think to describe them as Foreign companies is probably misleading though as although based in Tax Havens they may well belong to offshore trusts for whom the beneficiaries are UK citizens.

So an unintended consequence of all the Government changes has been to put financial challenges in the way of the individual Buy to Let property investor with a small savings pot, but to put few challenges in the way of companies, both UK and Foreign along with more wealthy individuals who can afford to use offshore trusts. I am not at all sure this was intended and so I suspect this story will grow and we will see future tax changes. As the Government wishes to encourage the inflow of money into the country from abroad it will be interesting to see how they tackle this issue.

The third trend, which was also predicted over a year ago, has resulted from the coming together of several factors. These are the reaction of individual Landlords to the Chancellor’s changes, the rise of the AirBnB website and the weakness of Sterling. Once the changes had been made by the Chancellor many people including ourselves predicted a movement away from Long Term rentals into Short Term Holiday rentals.

This is because if the property achieves the qualifying criteria, it is treated not as a buy to let but as a trading business. This is the only way individual’s investors can obtain the same financial benefits as the larger company based Landlords. Coupled with the rise of AirBnB, and the exchange rate encouraging both foreign and stay at home holiday makers it is resulting in a boom in the Holiday rental market. This is where I would expect to see growth for individual Buy to Let property investors concentrated over the next few years. Of course a key criteria is that the property must be in an area which attracts visitors and this may lead to a change in the relative increase in localised property prices as the potential rental property in these areas is snapped up.

The qualifying criteria are not simple to achieve either, the property has to be available to rent out for a minimum of 210 days per annum, be actually let for at least 105 days and limits are imposed on the number of rentals lasting over 31 days. These criteria need to be achieved in at least one year in every three, and if the property is let out for over 140 days per year then it should be subject to Business rates. The rewards though are significantly higher for the Landlord when compared to a normal Buy to Let property and so the trend to Holiday rentals will continue.

Again the Government in future may wish to address this area, thus penalising the small property investor again, however the level of rental property available, along with the weakness of Sterling is helping to grow the UK Holiday industry so any action taken would have to be carefully considered.

So three trends predicted over a year ago, and three trends becoming visible in the market. Its interesting that the attempt to cool the Buy to Let property market and therefore make more property available for first time buyers the Government has seen some predictable and intended consequences occur, and as always we are seeing some unintended consequences as well. As a free market, to some extent, in trying to control it the Government may find itself drawn into ever more legislation, or may in fact step back. A realisation is dawning that the aim of releasing more property for first time buyers (and no doubt increasing tax receipts) is a worthwhile target but penalising the Buy to Let property market is probably not the best way to achieve it.